Dalmia Bharat - Weak pricing in East may impact profitability - ICICI Securities

Dalmia Bharat's (DALBHARA) Q2FY21 EBITDA at Rs7bn (up 48% YoY) was better than our/ consensus estimates owing to lower cost. Total cost/te declined 10% YoY vs our estimate of 3% YoY decline on lower fuel cost and fixed overheads. DALBHARA may sustain industry-leading volume growth over the next few years led by 5.5mnte capacity addition in East by Mar'21 and operationalising the recently acquired 3mnte Murli Industries (MIL) by Sep'21. However, profitability vs peers may be impacted due to the recent input cost escalations amidst likely weak pricing in its core markets of East region given large capacity additions planned by the industry. Accordingly, we reduce our target EV/E multiple from 8x to 7x, downgrade the stock to ADD (from BUY) and reduce target price to Rs1,020/share (earlier: Rs1,100) based on 7x Sep'22E EV/E on half-yearly rollover. The stock has almost doubled post our upgrade in first week of Apr'20.

- Revenue increased 8% YoY to Rs24.1bn, marginally lower than our estimates. Volume increased 7% YoY to 4.8mnte, while realisation declined 7% QoQ (up 2% YoY) to Rs4,815/te vs our estimate of 5% QoQ decline owing to higher price decline in East. Trade sales stood 68% vs 75% in Q1FY21. Our channel checks suggest prices broadly remained flat on MoM basis in company's key markets in Oct'20.

- EBITDA/te increased 38% YoY to Rs1,463/te (I-Sec: Rs1,352/te): Total cost/te declined 10% YoY / 4% QoQ vs our estimate of 3% YoY decline in Q2FY21. Raw material plus power & fuel cost/te declined 14% YoY (7% QoQ) due to stoppage of external clinker purchase post the commissioning of 3.1mnte clinker unit at Rajgangpur, Odisha, 3% YoY decline in fly ash prices, 9% YoY decline in slag prices and 17% YoY decline in petcoke prices. Freight cost/te increased 7% YoY (4% QoQ) on 17% YoY increase in diesel prices. Other expenses (including employees cost) declined 16% YoY owing to strict control over fixed overheads and better operating leverage.

- EBITDA to OCF conversion was strong at 116%. Company generated OCF of Rs15bn aided by working capital release of Rs2.8bn and incurred capex of Rs7.5bn (including Rs4.1bn for an acquisition of MIL) and utilised Rs4bn towards buyback in H1FY21. Net debt declined Rs8.4bn (including MTM gain of Rs4.7bn on IEX investments) to Rs20bn during H1FY21. Management is targeting to be debt free by FY23; although it is comfortable with net debt to EBITDA of 2-3x.

- Management expects 5.5mnte GUs (out of planned 7.8mnte) to be operational by Mar'21 and expects to operationalise 3mnte MIL by Sep'21. DALBHARA is expected to spend additional Rs4bn to revive the MIL plant in next 9-12 months. The company expects to incur capex of Rs4-5bn for East capacity expansion, Rs5bn for various cost improvement projects and maintenance capex of Rs3-4bn over the next 18 months. It has appointed Rajiv Bansal (ex-CFO of Infosys) as Senior Executive Director, while Group CFO and ED Jayesh Doshi has recently resigned.

Source : Equity Bulls

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