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Saturday 9 September 2017

Buy Dalmia Bharat Ltd For Target Rs.3,282.00 - Motilal Oswal

Volume growth led by North East operations: Cement volume for 1QFY18 grew 6% YoY to 3.99mt (v/s our estimate of 4.04mt), as volume ex-OCL increased 8% YoY. Pure cement realization increased by INR402/t QoQ (INR585/t YoY) to INR5,126/t, led by better realization in both East and South markets as also higher proportion of premium sales. Revenue grew 16% YoY to INR20.59b (v/s our estimate of INR20.33b).

Highest ever EBITDA/t despite cost pressures: EBITDA/t for 1QFY18 grew 15% QoQ (and 3% YoY) to INR1,395/t, as realization improvement more than offset the cost push. Unitary cost/t increased by INR175/t QoQ due to higher power and fuel charges, led by increase in petcoke prices. EBITDA increased 9%YoY to INR5.56b for 1QFY18. Interest cost declined just 12% YoY, as there were noncash charges of INR300m pertaining to hedging cost in 1QFY18. PAT grew 55% YoY to INR1.45b, as tax rate was lower at 31% in 1QFY18 v/s 43% in 1QFY17.

Concall highlights: (a) Interest cost was higher by INR300m due to non-cash charges related to hedging cost; (b) Net debt reduced by INR6.4b QoQ, led by receipt of INR5.25b from KKR stake sale; (c) Petcoke consumption was 75% v/s 78% in 4QFY17.

* Valuation and view: We believe the net debt reduction of ~INR7.5b in FY17 will continue into FY19. Net debt to EBITDA will reduce to below 1.5x in FY19 from 2.8x in FY17. Operating cash flow is likely to see strong improvement, led by margin improvement on cost efficiency program and realization improvement by way of higher proportion of premium sales. OCL-DBL merger synergy benefits could further improve cash flow in FY19. We expect DBEL's valuation multiple to catch up with large caps, given improving balance sheet and earnings CAGR of 52% over FY17-19. We value DBEL at 12.5x FY20E EV/EBITDA (~20% discount to peers due to ~50% exposure to southern market) and arrive at a target price of INR3,282.

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