Initiate coverage on Dalmia Bharat with a buy rating and target price of R515 per share valuing the stock at 7x FY17e ebitda. At 6.4x EV/ebitda and $78 per tonne on FY17e capacity, the stock trades at a 40% discount to diversified pan-India plays, despite gaining tremendous scale and reasonable diversification – it is the fourth largest cement company in the country with 23.9 million tonnes per annum of aggregate capacity, and a presence across South, East and North East India, even as it steps up its sales effort to enter Maharashtra. Our target is based on 7x ebitda multiple, fair given Dalmia’s increasing scale and diversified presence against other regional plays.
So far, Dalmia Bharat has not enjoyed comparable valuations due to under-utilised capacity, dominant presence in South India, which has so fat experienced inferior profitability, and high leverage that worked against the company in a rather challenging business environment in the year gone by. In our view, improving prospects fro demand in the South and stabilization of inorganic expansions undertaken in the North East are likely to start yielding results in the coming years leading to a re-rating in valuation multiples.
