DBEL reported volumes of 7.6mt for 1HFY18, up 6.3% y-o-y. Although volume growth was significantly lower compared with c20% y-o-y growth in FY16 and FY17, industry outperformance continued.
DBEL reported volumes of 7.6mt for 1HFY18, up 6.3% y-o-y. Although volume growth was significantly lower compared with c20% y-o-y growth in FY16 and FY17, industry outperformance continued. The cost performance for DBEL has been commendable, in our view, as the company reported the lowest y-o-y increase in cost/t among peers and the highest Ebitda/t (Rs 1,213/t) for Q2FY18. Better operating performance resulted in 1HFY18 Ebitda rising 7.4% y-o-y. The operating leverage and deleveraging themes that we have highlighted since our initiation report helped net income to surge by 114% y-o-y in 1HFY18, again the highest growth among peers. The stock price has risen significantly, up c140 % YTD vs. 20-30% for other cement peers in our coverage.
Favourably placed to pursue further growth
DEBL’s improving profitability and focus on deleveraging brought its net debt/Ebitda ratio down to 2.2x at end-2QFY18 vs. 3.8x at end-FY16. With capacity in the East operating at high utilisation levels and weak demand conditions persisting in DBEL’s core market in the South, we believe the time is ripe for DBEL to pursue organic as well as inorganic expansion. Media reports suggest that DBEL is looking to acquire stressed assets in the North (Binani Cement with 6.25mtpa of capacity) and the Central region (Murli Industries with 3mt) of India. In fact, the media reported last Wednesday DBEL is set to acquire Murli Industries, having decided to infuse Rs 400 crore in it. Although management has not confirmed these reports, we believe acquisitions of these assets would help Dalmia to regionally diversify, further boosting its aspiration to become a pan-India cement producer. We note that the acquisition of Binani Cement in particular would help DBEL to increase its capacity by a fourth to c32mt, bringing it broadly at par with ACC and ahead of ACEM.
We raise our target price to Rs 3,400 and reiterate our Buy rating
DBEL has guided for FY18 volumes growth to be in the range of 6-8 %. Therefore, we cut our volume estimates for FY18-19e by 4-5% and Ebitda estimates by 9-12%. We raise our target FY19 EV/Ebitda multiple for DBEL to 13x from 11x. We estimate a strong CAGR for EPS of 55% for FY17-20e, and hence, we do not expect the stock to de-rate. We derive a fair value target price for Dalmia of Rs 3,400, up from 2,910 earlier.
Change in estimates
We cut our FY18-19e Ebitda estimates for DBEL by 9-12%. The lower tax guidance for FY19e, however, results in our net income estimates falling marginally vs. our previous estimates. DBEL has guided for its FY18e volume growth to be in the range of 6-8%. This is lower than our estimate of 12% for FY18e and 1HFY18 reported volume growth of 6% y-o-y. Also the utilisation level for DBEL’s assets in the East region have been high given strong demand witnessed in this market. This coupled with weakness in DBEL’s core market in South results in cuts of 4-5% for our FY18-19e volume estimates. We are below consensus for FY18e. However, our FY19/20e Ebitda estimates are 5/1% ahead of consensus.