With 1-Year Return of 70.69% This Cement Stock Has A Buy Rating: IIFL Securities

The brokerage house IIFL Securities has placed a buy call on the shares of Dalmia Bharat. This mid-cap firm, which has a market worth of Rs 37,712.60 Cr, is a frontrunner in key sectors such as cement, refractories, and sugar. The stock has returned 70.69 percent to shareholders in the previous year, rising from Rs. 1185.45 on January 12, 2021 to Rs. 2028.90 presently. On 14 September 2021 and 18 January 2021, the stock reached a 52-week high of Rs 2548.40 and a 52-week low of Rs 1081.00, respectively. The brokerage company has set a target price of Rs. 2250 for the stock and expects it to achieve that level in six months.

Investment rationale for Dalmia Bharat Ltd (DBL) according to the research report of the brokerage

• In line with the capital allocation policy unveiled in July 2021, DBL has 1) sold part stake in IEX (balance stake to be divested over time) as well as approved divestment of its retail business (Hippo Stores) to promoters for consideration of Rs1.15bn; 2) declared a dividend of Rs4/share (10% of 1HFY22 OCF), given its policy to distribute at least 10% of OCF to shareholders; and 3) strengthened the balance sheet - Rs6.38bn debt repaid in 1H; DBL is now a net-cash company. Further, capacity adds are on track; DBL has commissioned 2.25mtpa in Odisha and begun trial runs at its Maharashtra plant (3mtpa, COD by Dec 2021). Concrete plans are in place to ramp up capacity to 48.5mtpa by FY24, at an estimated CAPEX of Rs100bn. Separately, its Murli unit will double the incentives to Rs2bn pa.
• Volumes during the quarter are up 6% YoY despite demand pressure in the eastern markets. Volume growth was driven by the ramp-up of the 4.5mtpa capacity in the East market in the last 12 months. Capacity utilization in 2QFY22 stood at 66% vs. 72% a year ago, due to an increase in capacity. Healthy volume growth coupled with tight control over costs was more than offset by weak realisations, leading to a 26% YoY and QoQ decline in Ebitda per tonne to Rs1,076 in 2QFY22.
• DBL's gross debt reduced by Rs1.62bn during the quarter to Rs31bn, while it has turned net cash with net debt-to-Ebitda at -0.48x (1QFY22: 0.08x). However, based on its robust expansion plan (12.4mtpa over FY22-24E), the company is likely to clock net debt till FY24ii; we anticipate net debt-to-Ebitda to remain below 0.6x till FY24ii. The cost of borrowing has also been reduced, by 140bps YoY to 5.6% (2QFY22) vs. 7.6% (2QFY21). On the other hand, the company's operating cash flow sharply declined by ~52% YoY to Rs7.83bn, due to higher working capital requirements (sharp increase in fuel prices and payment to creditors).
• The company has commissioned a cement capacity of 2.25mtpa at Kapilas, Odisha (East) by end-Sep '21. It has also commenced trial runs at its 3mtpa cement plant in Maharashtra (erstwhile Murli Industries) and is likely to begin commercial production by Dec-21. With this, DBL's cement capacity by end-Mar '22 will increase to 36mtpa. For the balance of 12.4mtpa (as announced till date), the company is progressing well (ordered four cement mills in the current month, applied for environmental clearances and finalized sites for greenfield expansion in Tamil Nadu) and is confident about completing the same as per planned schedule. The company has utilized CAPEX of Rs8bn till 1H and guided to total CAPEX spend of Rs30bn for full-year FY22E.

Buy With A Target Price of Rs. 2250

IIFL Securities has said in its research report that "Sharp fall in cement prices in DBL's core markets impacted its 2Q performance; however, price increases in October in both, the East (Rs15-25/bag: +7% over 2Q) and South (Rs40- 50/bag: +13% over 2Q) are likely to support margins. Persistent cost pressure is a key risk to margins; however, with the likely ramp-up in volumes, the company may be able to pass on such cost pressures. New capacity addition (5.25mtpa in 3QFY22) should also drive higher-than-industry volume growth. Stock valuations at 12x FY23ii EV/EBITDA are attractive and the stock has the potential to re-rate. Thus, we initiate a 'BUY' on the stock with a target price of Rs. 2250."

Disclaimer

The above stock has been picked from the brokerage report of IIFL Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.