Dalmia Bharat: Exiting non-core assets; capacity adds on track

Recommendation: Buy

Target Price: Rs 2,300

Recent weakness in East and South pricing has weighed on stock valuation, but falling fuel prices would support earnings growth going ahead. Timely capacity additions would also help the company deliver better-than-industry volume growth. Analysts at IIFL Securities value the stock at 12x 2YF EV/EBITDA – as they believe that valuation discount to peers would narrow.  

Monetization of non-core assets continues

In line with its capital allocation policy (2021), DBL continues to divest non-core assets to invest in core Cement business. The company has: 1) Sold 5% stake in IEX for Rs6.14 billion; would further trim the balance 15% stake in due course. 2) Exited Hippo stores for Rs1.55 billion (would receive Rs1.2 billion cash in December 2023). 3) Now sold its 42.36% stake in DBRL (Refractory business) for Rs8 billion (would receive cash over 18 months). The money received would further strengthen its balance sheet and support capex plans of Rs30 billion p.a. (over three years; ex of any acquisitions). As such, DBL targets to limit its net debt-to-EBITDA at 2x (with the exception of any inorganic opportunities).

Refractory business sold to Group company

The DBRL stake has been sold to the promoter group entity — M/s Sarvapriya Healthcare Solutions Private Limited — for Rs8 billion (investment carrying value of Rs4 billion, tax implication of Rs0.5 billion; to be booked in Q4FY23). The deal will be consummated within a month. Of the Rs8 billion, 20% would be upfront cash payment. For the balance Rs6.4 billion, 8.5% NCDs are issued that would mature in December 2023 and September 2024 (Rs3.2 billion each). DBRL is valued at Rs18.9 billion — a significant part of valuation is derived from its 14.4% stake (Rs16-17 billion) in RHI Magnesita India Ltd (listed company), to which Indian refractory operations were sold in January 2023; while the balance is for the overseas Refractory business in China and Germany.

Timely capacity adds to drive volume growth

DBL is on track to achieve 12mtpa capacity addition by FY24 end (60% in East and 40% in South). The company remains confident that demand is the eastern region would be strong, driven by both affordable housing and infrastructure projects. In addition to this, DBL has also signed definite agreement to buy 5.2mtpa of JP assets in Central India – taking the total capacity to 54mtpa by FY24 end. Note that JP deal would mark DBL’s foray into the Central market. As such long term plan of the company is to achieve 75mtpa by FY27 and 110-130mtpa by FY31.