IDEA2ACT - Buy: Dalmia Bharat

Buy - DALBHARAT

CMP (NSE) 15:41, 20 May

1,399.50 30.352.22%

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Sector

Cement

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Reco. Price

1,918

Period

6-Months

Target Price

2,250

upside

%

Stop Loss

0

Last updated on

10 Jan, 2022

Dalmia Bharat (DBL), is the 5th largest cement player in the country, with clinker-backed cement capacity of 33mtpa (37% in the southern region and 63% in the eastern region, including the Northeast). DBL expanded cement capacity at 5% CAGR over the past 5 years, through organic and inorganic expansion modes. The company is promoted by the Dalmia Group, which has presence in the cement, power, and refractory businesses across the country. The Group also has presence in varied spaces – sugar manufacturing, travel agency, magnesite, and electronics – through 18% stake in Dalmia Bharat Sugar Industries.

Investment Rationale

Divestment in non-core business; capacity additions on track: In line with the capital allocation policy unveiled in July 2021, DBL has: 1) sold part stake in IEX (balance stake to be divested over time) as well as approved divestment of its retail business (Hippo Stores) to promoters for a consideration of Rs1.15bn; 2) declared dividend of Rs4/share (10% of 1HFY22 OCF), given its policy to distribute at least 10% of OCF to shareholders; and 3) strengthened the balance sheet – Rs6.38bn debt repaid in 1H; DBL is now a net-cash company. Further, capacity adds are on track; DBL has commissioned 2.25mtpa in Odisha and begun trial-runs at its Maharashtra plant (3mtpa, COD by Dec 2021). Concrete plans are in place to ramp-up capacity to 48.5mtpa by FY24, at an estimated capex of Rs100bn. Separately, its Murli unit will double the incentives to Rs2bn pa.

Outlook and valuation

Sharp fall in cement prices in DBL’s core markets impacted its 2Q performance; however, price increases in October in both, the East (Rs15-25/bag: +7% over 2Q) and South (Rs40- 50/bag: +13% over 2Q), are likely to support margins. Persistent cost pressure is a key risk to margins; however, with the likely ramp-up in volumes, the company may be able to pass-on such cost pressures. New capacity addition (5.25mtpa in 3QFY22) should also drive higher-than industry volume growth. Stock valuations at 12x FY23ii EV/EBITDA are attractive and the stock has potential to re-rate. Thus, we initiate a ‘BUY’ on the stock with a target price of ₹2250.

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