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Dalmia Bharat Limited (DBEL IN) Summary

Core Content

Dalmia Bharat Limited (DBEL) is a leading Indian cement producer, currently the fourth-largest by capacity with 24 mt of production. The company is being covered with a BUY rating and a Target Price (TP) of INR973, representing a +55% increase from the current share price. The TP is based on a 7.5x FY17 EV/EBITDA multiple, which is 26% below the top three cement makers in India. DBEL's market capitalization is USD774M, and its average daily trading volume (ADTV) is USD0.7M.

Key Financials

Key Insights

• Valuation: DBEL is currently trading at 5.9x FY17 EV/EBITDA, which is below its 5-year average of 12.1x, indicating undervaluation.
• Profitability: EBITDA is expected to increase by 65% to INR15.5b in FY16 and 22% to INR19b in FY17, driven by:
  • Volume growth: 20% to 12.9 mt in FY16, 16% to 15 mt in FY17
  • Cost savings: Reduction in power/fuel costs and increased use of petcoke and alternative fuels
  • Consolidation of OCL: Full consolidation in FY16, contributing significantly to earnings
• Market Position: DBEL has a strong presence in South and East India, with:
  • 8% market share in South India
  • 13% in East and Northeast
  • 13% in Tamil Nadu, 13% in Kerala, 5% in Andhra Pradesh, and 5% in Karnataka
• Strategic Moves: DBEL has made strategic acquisitions in East and Northeast India (Adhunik and Calcom in 2012) and increased its stake in OCL to 74.6% in March 2015. These have enhanced its market share and profitability.
• Operating Leverage: The company has high operating leverage, allowing it to benefit from rising demand and pricing power.
• Cost Efficiency: DBEL is one of the lowest-cost producers in India, with:
  • 22% raw materials, 20% power and fuel, 22% freight as major cost components
  • Variable costs expected to fall from INR1,770/ton in FY15 to INR1,661/ton in FY17
  • Fuel mix shifted to petcoke and other economical sources, reducing costs
• Future Outlook: DBEL is well-placed for a sector recovery, with:
  • Expected cement demand growth in India at 7-8% in 2HFY16
  • Focus on key markets such as South and East India, where demand is expected to grow
  • Lower capex intensity leading to a reduction in net debt/EBITDA from 6.3x in FY15 to 4.9x in FY17
• Catalysts: Earnings sustainability, strategic acquisitions, and cost efficiencies are expected to drive a re-rating of the stock.

Valuation Highlights

• EV/tonne: USD94.5, below replacement costs of USD118
• TP: INR973, implying a 21x P/E and USD118/tonne replacement cost
• Debt Reduction: The company is expected to reduce its net debt/equity ratio from 112.5% in FY14 to 115.9% in FY17, indicating a stronger balance sheet

Strategic Positioning

• East India: DBEL is the no. 1 player in East India, with a 22% market share in Odisha and 18% in Northeast
• South India: It is among the top five producers in Andhra Pradesh and Tamil Nadu, with a 13% market share in Tamil Nadu
• Market Growth: The company is positioned to benefit from:
  • Infrastructure development in East India
  • Housing demand in Telangana (new state in Andhra Pradesh)
  • Political spending during elections in key states

EBITDA Drivers

• Volume increase: 40% of EBITDA growth in FY16
• Cost savings: 20% of EBITDA growth in FY16
• Selling price increase: 40% of EBITDA growth in FY16

Share Price Performance

Key Stakeholders

• Major shareholders:
  • Mayuka Investments Ltd. – 22.0%
  • Shree Nirman Ltd. – 9.6%
  • Sita Investments Co. Ltd. – 7.2%
• Private equity: KKR owns 15% of DCBL, DBEL's unlisted subsidiary, with an investment of INR7.5b in May 2010

Conclusion

DBEL is expected to deliver strong earnings growth due to its strategic acquisitions, cost efficiencies, and strong market positions in South and East India. The company's low EV/EBITDA multiple, high operating leverage, and projected cost savings make it an attractive investment opportunity. The BUY rating and target price reflect the potential for a stock re-rating as the cement sector recovers and DBEL's performance stabilizes.