‘Underperform’ on Dalmia Bharat due to high leverage

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Published: March 31, 2016 1:05:25 AM

Dalmia announced restructuring with: amalgamation of all East assets into OCL (sale of Bokaro unit from Dalmia to OCL), amalgamation of Adhunik (North East) into DCBL (South assets). Merger of Adhunik saves tax of `1.2 billion (already in estimates).

Dalmia announced restructuring with: amalgamation of all East assets into OCL (sale of Bokaro unit from Dalmia to OCL), amalgamation of Adhunik (North East) into DCBL (South assets). Merger of Adhunik saves tax of `1.2 billion (already in estimates).

The key benefit of restructuring is redistribution of debt, while consolidated net debt remained similar (5x EBITDA). OCL which was debt-free earlier now has debt equal to 2.5x EBITDA. Debt on ex-OCL business falls from 6.6x EBITDA to 6.1x. Bokaro unit is valued at `12.9 billion, similar to the cost at which Dalmia bought. The transaction involves debt transfer of `9.5 billion, and Dalmia issued preference shares worth `3.4 billion.

At current profitability of Bokaro, the deal is cash neutral from OCL’s perspective, but utilisation is low at 55%. In steady state, the deal is EPS accretive. OCL effectively acquired the asset at 6.5x steady-state EBITDA vs the mid-caps trading at 8-8.5x currently. The synergies are about `50-60/t (procurement and logistics synergies) and add 2-3% to consolidated EBITDA. We maintain ‘underperform’ due to high leverage and South exposure.

Dalmia Bharat has announced a restructuring of its assets: amalgamation of the 2.6 million t Bokaro asset (currently a 100%-owned subsidiary, DECL) into OCL, amalgamation of Adhunik (100%- owned subsidiary; North-East) into DCBL (which holds South assets), transfer of 74% stake in DCBPVL (which holds 99MW South captive power plants) from the power subsidiary to DCBL.

Management expects the restructuring process to be completed in 8-10 months.

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