Buy Dalmia Bharat Ltd for the Target Rs 2,250 by Emkay Global Financial Services Ltd
We upgrade Dalmia Bharat (Dalmia) to BUY from Add and revise up our TP by ~13% to Rs2,250 from Rs2,000. Dalmia reported consolidated EBITDA of Rs8bn (down 9%/11% yoy/qoq), which is ~8%/9% above Emkay/consensus estimates driven by strong price hikes in operating regions and astute fuel inventory management. Volume grew ~9% yoy, partly hit by state elections in core markets (TN/Assam), while realization rose ~6% qoq (Rs280/t). Dalmia’s fuel inventory management helped contain the fuel inflation by >Rs150/t, leading to qoq fall of 1.3% (Rs23/t) in unit (P&F + RM) cost. Fixed costs rose by ~Rs210/t qoq, mainly due to escalation in packing bag prices. Consequently, EBITDA/t stood at Rs1,055 (Emkay: Rs960) vs Rs1,260 yoy and Rs1,025 qoq. We believe Dalmia is well buoyed, owing to its
1) Clear blueprint, to achieve ~67mtpa by 3QFY28 (up 35% from FY26-end) with a soft target to reach ~110mtpa by 2031
2) Aim of logging ~16% volume CAGR over FY26-28 (including volume from JPA assets)
3) Target to see structural demand improvement in East India in the medium term. This, coupled with attractive valuation of ~9x FY28E EV/EBITDA and a comfortable leverage profile, makes Dalmia upgrade-worthy. Further, on the back of a strong 1Q and better fuel cost management, we raise FY27E/28E EBITDA by ~31%/15%. We continue to value Dalmia at 11x (5Y average: ~13x) FY28E EV/EBITDA.
Sustained price hikes and efficient fuel management drive healthy margins
Dalmia's volume grew ~9% yoy (albeit down ~13% qoq), partly impacted by state elections in its core regions. Successful absorption of price hikes and an all-time-high premium share (25%) drove the ~6% qoq growth in realization, translating into ~7% yoy revenue growth at ~Rs39bn. Unit operating cost rose ~3%/7% yoy/qoq, due to higher fixed cost (up 22% qoq) due to expensive packing-bags. Higher diesel (both retail and industrial) prices resulted in a 6% qoq rise (Rs64/t) in unit freight, which was the only inflationary item in unit variable costs (on sequential basis). Consequently, EBITDA stood at ~Rs8bn, with EBITDA margin of ~21%, implying dilution of a meager 55bps qoq despite the volatile fuel costs scenario. Further, Dalmia incurred one-off acquisition cost of ~Rs1.8bn (~6% of consideration) pertaining to regulatory costs for acquisition of JPA assets. Dalmia views this as a provisional estimate and expects lower outflow in ensuing quarters. Consequently, reported PAT of Rs1.9bn was down >50% yoy/qoq, while recurring PAT stood at Rs3.7bn
Ongoing expansions ensure volume growth visibility; debt profile comfortable
Dalmia completed the JPA central India acquisition on May-26 (5.2/3.3mtpa cement/clinker at EV of Rs28.5bn), increasing capacity to 54.7mtpa. We expect 40%/70% capacity utilization of the new assets, in FY27E/28E. The ongoing expansion at Belgaum (4QFY27), Pune (2QFY28), and Kadapa (3QFY28), coupled with ramp-up in acquired assets, should ensure robust volume growth after FY28 as well. Net debt/EBITDA rose to 1.47x (vs 0.46x qoq) on the buyout, staying below the management's 2x threshold.
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