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Spark Capital : Dalmia Bharat Initiating Coverage - Heading towards the big league; Initiate with a BUY




Spark Capital Advisors(India) Private Limited


21 Dec 2012





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Heading towards the big league; Initiate with a BUY Dalmia Bharat Limited (DBL) is fast emerging as a sizeable cement player through aggressive expansion plans both via organic and inorganic route. DBL’s current group capacity post the acquisition of Adhunik is ~17.1mt and will reach 21.8mt in 2-3 years time. We initiate DBL with a BUY rating with a SoTP based target price of Rs. 230/share. At CMP, the stock is trading at an EV/t of $37, ~73% discount to replacement cost and an EV/EBITDA of 2.5x FY14E earnings. We believe the steep discount is unwarranted as the company is well managed which is reflecting in its efficient cost structure and leading market position in its key markets. The target price is arrived based on 5x FY14E EBITDA for cement business and book values for investments in OCL and Calcom Cement. Investment rationale: Aggressive capacity expansions will aid strong volume growth: From a capacity of 3.5mt in FY08, DBL has aggressively expanded its capacity to 9mt by FY11. DBL’s impressive track record of capacity expansion continues with the acquisition of Adhunik Cement’s 1.5mt plant in Meghalaya and a 76% stake in Calcom’s 1.3mt plant in Assam and setting up of a Greenfield cement plant of 2.5mt at Belgaum, Karnataka. DBL’s cement volumes grew at a strong rate of 17% CAGR over FY09-FY12 and with further capacity additions and lower utilisations from the existing plants, we expect DBL to continue to deliver strong volume growth over the next few years Sizeable market share in its key markets: DBL has demonstrated its ability to gain market share and also has sizeable market share in its key markets, which helps them command premium pricing over the other mid/smaller players. Dalmia group has a market share of 14% in TN, 13% in Kerala, and ~27% in Orissa vial OCL. Further in North East, DBL has ~43% of the installed capacity in the region on the back of recent acquisitions Superior variable cost structure versus peers: DBL’s variable cost/t is the least compared to the other similar sized South based cement players, Madras Cements (MC) and India Cements (ICEM). This is primarily due to lower raw material and freight costs. DBL’s lower raw material costs are due to its 100% integrated units, which helps them save clinker transfer costs. Given all their units are well located and closer to their key markets, DBL’s lead distance is significantly lower at ~300kms vs. 500-550kms of its peers. Balance sheet at comfortable levels despite large capex: We expect DBL to incur ~Rs. 26bn over FY13-15E to fund its organic and inorganic expansion plans. Despite this, we expect net leverage to stay at comfortable levels of ~0.7x equity in FY15E. We expect DBL to generate strong operating cash to the tune of ~Rs. 22bn in the same period. Key risks: (1) Fall in cement prices; (2) Increase in input costs; & (3) Related party transactions

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