Axis Securities Suggests Buy This Mid Cap Cement Stock For 30% Gains, Reported 7.8% YoY Sales Growth

Stock Overview

Money, 20 June 2022, the Current Market Price (CMP) of Dalmia Cements Ltd is Rs 1,250/share, opened at at Rs 1,257/share. The the previous close was 1,259.40/share. It has touched the 52-week low at Rs 1,228.10/share level this month on June 7, while the 52-week high is Rs 2,548.40 per share level on 14 September 2022. The stock's CMP is near its 52-week low on NSE.

Over the last 1 year, the stock has fallen nearly 29.92%. The share price tumbled in recent times, as it also hit the 52-week low this month. However, it has given positive returns of almost 17.32% in 3 years.

Potential Gains - Taking the target price and the CMP of the stock, it has the potential to be nearly 30%.

Dalmia Bharat Business Updates

Dalmia Bharat Cement (DBCL) - a wholly-owned subsidiary of the company, added 5.15 MTPA of Grinding Capacity (2.25 MTPA at Dalmia DSP Unit- II, near Cuttack (Odisha) and 2.9 MTPA at Murli Plant in Maharashtra) during the year. The said expansion increased its total capacity to 35.9 MTPA in FY22 from 30.75 MTPA in FY21. The company also doubled its renewable power capacity to 63 MW in FY22 from 32 MW in FY21. Furthermore, it has added 32 MW of thermal power through the acquisition of Murli Industries limited.  The company expended Rs 1,988 Cr on capex in FY22. It lowered its Gross Debt by 586 Cr to Rs 3,140 Cr in FY22 through pre-payments and repayments of various term loans, non-convertible debentures, short-term loans, and buyer's credit. Its Net debt stood at (1,421) Cr and net debt/ EBITDA at (0.59x) as of March 31, 2022.  DBL aims to expand its total cement grinding capacity from the current 35.9 MTPA to 48.5 MTPA by FY24. The company intends to spend Rs 9,000 Cr on capacity expansion and green initiatives to be funded through internal accruals and debt. It targets a capacity of 130 MTPA by 2030.

Business key Highlights

Healthy growth in the sales volumes: In FY22, the company's cement sales reported healthy volume growth of 7.8% YoY to 22.3 MTPA from 20.7 MTPA in FY21. The volume growth was driven by the pent-up demand and normalization of economic activity post lockdown relaxations.

Margin contraction due to elevated costs: The company recorded an EBITDA margin of 21.4% against 27.2%. Elevated cost dented its margins, particularly Power & fuel costs, which shot up 42% on a tonne basis YoY. Cost optimization measures adopted by the company greatly aided in controlling costs to a certain extent. In the absence of such initiatives, the impact on margins would have been much higher.

Formal adoption of Capital Allocation Policy: During the year, the company formally adopted a Capital Allocation Policy based on the central principle of delivering predictable, sustainable, and profitable growth over the next decade coupled with a robust balance sheet and adherence to the highest standard of corporate governance.

Focus on blended cement: In line with its commitment to environmental sustainability, the company continued to focus on producing and promoting blended cement (80% of sales). It aims to produce 100% blended cement in the next 5 years and 100% transition to renewable energy by 2030.

Brokerage's views & comments, Suggest Buy for TP 1,635/share

The company's expansion plans are progressing well. Moreover, it is confident of better demand momentum in FY23. However, current high energy prices are posing challenges and we expect the cost to remain elevated in H1FY23, which would moderate only gradually in H2FY23. Since the majority of the capacities are being added in the Eastern region, pricing, as well as sustenance of demand remain key monitorables. With attributes such as the company's superior positioning in the key markets of East and South India, new capacity ramp-up along with its cost optimization measures coupled with the government's focus on infrastructure and low-cost affordable housing and increasing real estate demand, we expect DBL to improve its market share and deliver decent performance going forward. The stock is currently trading at 11x and 8x FY23E and FY24E EV/EBITDA.

The brokerage said, "We value the company at 10x FY24E EV/EBITDA to arrive at a target price of Rs 1,635/share implying an upside potential of 30% from the CMP and maintain our BUY rating on the stock."

Company Overview- Dalmia Bharat Ltd

Founded in 1939, Dalmia Cement is one of India's pioneering homegrown cement companies. Headquartered in New Delhi, the company operates as Dalmia Cement (Bharat) Ltd, which is a 100% subsidiary of Dalmia Bharat Ltd. The company offers a range of cement variants through its brand portfolio of three marquee brands: Dalmia Cement, Dalmia DSP and Konark Cement.

The company operates a manufacturing capacity of 35.9 MnT per annum (MTPA), across 14 cement plants and grinding units which are spread across 10 states. With over 33,000 dealers and sub-dealers, the company presently services more than 22 states and is among the leading players in every region where it is present in. Dalmia Cement is the only company with at least one plant in each of the four key eastern states of West Bengal, Bihar, Jharkhand and Odisha.