Buy Dalmia Bharat Ltd for the Target Rs. 2,620 by Choice Institutional Equities
Strong Capacity Addition Plans are Encouraging
We maintain our BUY rating on Dalmia Bharat Ltd. (DALBHARA), with a TP of INR 2,620. We continue to be positive on DALBHARA owing to: 1) Addition of ~25.5 Mtpa capacity by FY28E in new untapped regions at a reasonable capex outlay, 2) Long-term structural benefits from GST rate cut, 3) Execution on optimisation program to cut cost by INR 150– 200/t by FY28E, with increase of renewable energy capacity to 576MW by FY26E vs 387 MW in Q2FY26, 4) Sector tailwinds – demand rebound and healthy pricing level across markets, 5) Disciplined capital allocation and 6) Expansion in ROCE by 678 bps over FY25– 28E.
We forecast DALBHARA’s EBITDA to expand at a CAGR of 27.1% over the FY25–28E basis, our volume growth assumption of 9.0%/10.0%/10.0% and realisation growth of 4.5%/2.0%/2.0% in FY26E/27E/28E, respectively.
We adopt a robust EV to CE (Enterprise Value to Capital Employed)- based valuation framework (Exhibit 3), which allows us a rational basis to assign the right valuation multiples for DALBHARA. We assign an EV/CE multiple of 1.75x/1.75x for FY27E/28E, which we believe is conservative, given the doubling of ROCE, from 5.0% in FY25 to ~11.8% in FY28E under reasonable operational assumptions. We do a sanity check of our EV/CE TP using implied EV/EBITDA, P/BV and P/E multiples. On our TP of INR 2,620, FY28E implied EV/EBITDA/PB/PE multiples are 10.9x/2.3x/23.1x, which are modest in our view.
Risks:
DALBHARA’s growth trajectory hinges on the successful commissioning of ~25.5 Mtpa capacity by FY28E. Possible delays or execution bottlenecks could defer volume ramp-up and impact projected ROCE expansion.
Fluctuations in pet coke and coal prices, as well as supply disruptions due to geopolitical events.
EBITDA Beat Driven by Lower-than-expected Cost; Volume a Small Drag due to One-off Events
DALBHARA reported Q2FY26 consolidated revenue and EBITDA of INR 34,170 Mn (+10.7% YoY, -6.0% QoQ) and INR 6,960 Mn (+60.4% YoY, - 21.2% QoQ) vs Choice Institutional Equities (CIE) estimates of INR 33,919 Mn and INR 6,554 Mn, respectively. Total volume for Q2 stood at 6.9 Mnt (vs CIE est. 6.8 Mnt), up 3.0% YoY and down 1.4% QoQ, the drag was due to one-off events.
Realisation/t came in at INR 4,952/t (+7.5 YoY and -4.7% QoQ), which is lower than CIE’s est. of INR 5,012/t. Total cost/t came in at INR 3,943/t (-0.4% YoY and +0.3% QoQ). As a result, EBITDA/t came in at INR 1,009/t, which is a decline of ~INR 253/t QoQ, which is ahead of market expectation.
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