STRONG BUY Recommendation Of Mid-Cap Stock Dalmia Bharat Ltd

We initiate a coverage on Dalmia Bharat Ltd (DBL) with a “STRONG BUY” rating. Company is the fifth-largest cement player in India with current cement capacity of 26.5 Million Metric Tonnes (MMT) and power capacity of 195 MW. Furthermore, DBL is in the process of expanding its present capacity by ~40% from 26.5 MMT to 37.3 MMT, with exposure across South, East, North East and West. With access to 22 states, it has gradually elevated from the stature of a regional player. The company has undertaken steady expansion at an economical cost of ~$70/ tonne, lower compared to the replacement cost of setting up a new plant.

DBL has been generating healthy cash flows, helping the company to de-leverage the balance sheet, execute acquisitions, expansions and implementing buyback (recently completed a buy back of Rs 3.28 billion). We expect company is well-poised for a re-rating given growth visibility, improving balance sheet and attractive valuation.

Our key investment thesis are as follows.

Capacity expansion to drive growth & further strengthen its market presence: DBL has pursued aggressive brownfield, greenfield & both organic & in-organic capacity expansions along with a focus on regions where it can attain a higher market share. Company is spending Rs 36– 38 billion cumulatively on the expansion of projects. The majority of these expansions are taking place (7.8 MMT) in the eastern region where the company has a good market position coupled with the acquisition of Murali Industries will allows the company to enter into western Maharashtra market.

Cost efficient cement producer: DBL is among lowest cost cement producer and enjoys superior profitability due to (1) Higher blending & cement-to-clinker ratio (2) modernisation and upgradation of plants leading to industry-leading lower electricity consumption (3) Increased usage of alternate fuels like pet coke. Operating efficiency provides the company a significant cost advantage vs. peers in the environment of subdued demand, lower utilisations and rising costs.

Improving Financials: Strong operating cash flows is expected to drive strong free cash flow (FCF) and reduce net debt from Rs 28 billion at the end of FY20 to Rs 16 billion in FY22E. In the absence of new projects, we expect company to become debt-free (net debt level) in FY23E. Dalmia Bharat Ltd . We have valued the company assigning equal weightage to 8x FY22E consolidated EV/ EBITDA and assuming a replacement cost of USD75x FY22E EV/Tonne to arrive at target price of Rs 1010 per share.