Dalmia Bharat - Strong margin show despite East exposure - ICICI Securities

Key takeaways from Dalmia Bharat's (DALBHARA) management concall include: i) demand turned weak post mid-Jul'20 owing to sporadic local lockdowns and floods in some of the company's key markets; ii) company would continue to gain market share as it increases its capacity ~40% over FY21-22E; iii) balance sheet remains strong as net debt declined by Rs7.3bn in Q1FY21 even after buyback of shares totalling to Rs3.3bn; iv) commissioning of clinker line-3, increased logistic optimisation and fixed-cost rationalisation would contain cost escalations from the recent increase in fuel / diesel prices. Improving cost structure would ensure a better than industry average EBITDA/te for the company despite higher exposure to East region (where prices may remain under pressure). Maintain BUY with a target price of Rs1,100/share based on 8x FY22E EV/E.

- Seasonal weakness may impact Q2FY21E: Demand has turned weak post mid-Jul'20 owing to sporadic Covid-19 local lockdowns in Chhattisgarh, Odisha, Tamil Nadu and Karnataka, and floods in Bihar and Assam. Prices too have corrected by Rs10-12/bag QoQ across both the markets of South and East. Management expects demand to improve from Q3FY21 on the back of better infra demand.

- Market share gains to continue: DALBHARA gained market share by 300-400bps in East and 100bps in South in Q1FY21, as per the management. Company remains confident of sustaining higher than industry average volumes as it increases its capacity by ~40% over FY21-22E also aided by higher exposure to the better-growth East region. Trade sales grew to 75% vs the usual 60-65%, with premium product sales at 18% of trade sales in Q1FY21. Incentive income was Rs170mn in Q1FY21 vs the usual ~Rs300mn, with incentive receivables at Rs7.2bn as at Jun'20-end.

- Management expects to commission West Bengal and Odisha grinding units (GUs) by Dec'20 and Mar'21 respectively; while Bihar GU is likely to be commissioned by Mar'22. DALBHARA received NCLAT approvals under IBC proceedings to acquire the 3mnte Murli Industries (MIL), Maharashtra, for Rs4bn for which payment is likely to be made soon and would take another 12 months and additional capex of Rs4bn-5bn to restart operations. Capex guidance for FY21 stands at Rs8bn excluding acquisition cost and additional capex for MIL.

- Q1FY21 raw material costs/te declined by a sharp 19% QoQ to Rs701/te as:

a) Q4FY20 included higher external clinker purchase, which was absent in Q1FY21; b) Rs100mn-120mn of clinker cost from line-3 was capitalised as the same is under trial run, and c) share of blended cement was higher at 85%. Commissioning of clinker line-3, increased logistic optimisation and fixed-cost rationalisation would contain cost escalations from the recent increase in fuel / diesel prices. We model 9% volume CAGR over FY20-FY22E and expect EBITDA/te to increase from Rs1,092/te in FY20 to Rs1,248/te by FY22E.

Shares of Dalmia Bharat Ltd was last trading in BSE at Rs.772.25 as compared to the previous close of Rs. 779.65. The total number of shares traded during the day was 2672 in over 563 trades.

The stock hit an intraday high of Rs. 794.3 and intraday low of 772. The net turnover during the day was Rs. 2088797.

Source : Equity Bulls

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