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stenance of price hikes imperative for earnings upgrade

Dalmia Bharat is expected to benefit from the sharp price hike of ~Rs45-50/bag in Sep-23, in the East. Besides, the South has announced price hikes, of Rs70- 80/bag wef Oct-23. Both regions contribute more than 80% of Company volume. Absorption/sustenance of the price hikes is a key monitorable. Dalmia targets increasing capacity to 75/110-130mt by FY27/31, resp. (~15% CAGR), with ~80% of upcoming capex likely to be funded via internal accruals over FY23-26E. This will keep Company’s balance sheet (BS) at a comfortable level, with net debt-to-EBITDA under 1.5x. Factoring-in the higher realization, we raise FY24-26E EBITDA by 6-9%. Given Company’s growth visibility and strong BS, we nudge up our target EV/E by one notch to 12x (earlier 11x) and revise Sep-24E TP to Rs2,525/sh, post quarterly roll-over; we maintain HOLD.

Sharp price hikes in Sep-23 sustaining in the East; announcement for the South

Our channel checks suggest that price hikes of Rs45-50/bag in the East (vs announcement of Rs70/bag) have been absorbed during Sep-23. To recap, prices in East India have declined by Rs25-30/bag since start-CY23 till Aug-23. Besides, the industry has announced price hikes of Rs70-80/bag in the South and Rs5-20/bag in other regions, during Oct-23. Such price hikes sustaining would provide growth impetus to Dalmia’s earnings, specifically from H2FY24, as East+South contribute over 80% of its volume.

Focus on cost improvement by tracing the path to sustainability

Company has one of the best clinker-to-cement (CC) ratios, at ~1.75x (vs. industry average of 1.4-1.5x), owing to greater presence in the East. Further, Company is constantly undertaking measures to reduce the clinker factor through higher share of blended cement (targets 100% blended cement by FY26 vs 85% currently). Also, Company is looking to allocate ~10% of the OCF towards the green energy fund, with commitment to transition to 100% renewable power by 2030, and becoming carbon negative by 2040.

Well placed to seize long-term growth opportunities, backed by a strong BS

Company’s clinker/cement grinding capacity stands at 21.7/43.7mt, respectively. Dalmia has recapitulated its stance of aggressively increasing capacity to 75/110-130mt by FY27/31 (CAGR: ~15% during FY23-31). The successful acquisition of JP’s cement assets is a step towards enhancing presence in the central region and supporting its journey to become a Pan-India player. We believe the company will incur capex of Rs113bn (including the JP assets acquisition) during FY23-26E of which ~80% would be funded via internal accruals. Accordingly, we expect net debt to remain at comfortable levels, with net debt-to-EBITDA at lower than 1.5x.

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SEBI Registration number is INH00000035