DBEL and OCL India in their respective board meeting on 5th November 2016 approved the amalgamation of DBEL with OCL. Post amalgamation, OCL would be renamed as DBEL. The proposed merger ratio of 2:0 was derived on the basis of fair valuation — weighted average of three valuation techniques: discounted cash flow, EV/tonne and market price.
Management stated that the proposed merger would not result in any mine transfer issues related to MMDR Act. DBEL had initiated simplification of its holding structure in early part of 2016 with the acquisition of KKR’s stake in DCBL. It then amalgamated Adhunik Cement with DCBL. It also amalgamated OCL and Bokaro to have better synergies in operations.
This proposed merger is part of the restructuring exercise to have one listed entity and one cement operating company, which would help in consolidation and better management of cash flows.
Concerns about high gearing (net debt/EBITDA of 4x) should abate with steady asset sweating and disciplined capital allocation. Due to moderating capex, we expect net debt/EBITDA to improve to less than 3x by FY18.
With the conclusion of most large asset sales in India, the potential risk of increase in debt by way of asset acquisitions has mitigated.
We value DBEL at EV/EBITDA of 12X FY18E or R2,384/share.