Stock Recommendation | Dalmia Bharat - ADD - Target price : 2,335

Dalmia Bharat’s earnings were lower than our estimates—the company reported revenue of ₹21.6 bn (+18% yoy, -9% qoq) and EBITDA of ₹3.9 bn (-12% yoy, -26% qoq) against our estimates of ₹20.5 bn, ₹4.7 bn, respectively. Volumes increased 13% yoy to 4.1 mn tons (-8% qoq) aided by strong demand in key markets in the South and East. EBITDA/ton declined 19% qoq to ₹942/ton (-22% yoy) due to muted realizations and higher costs—the company’s blended realizations were flat qoq at ₹5,225/ton (flat qoq) while costs increased by 5% qoq to ₹4,283/ton (+12% yoy). The cost increase was largely on the back of an increase in slag and pet-coke prices. The company reported net-income of ₹20 mn, against our estimate of ₹1.1 bn due to higher depreciation and amortization costs (for goodwill from amalgamation).

Changes in our estimates
Exhibit 4 highlights the key changes in our estimates. We cut our FY2019E volume estimate (3% to 18.8 mn tons) but maintain estimates for FY2020E, FY2021E at 21 mn tons, 21.6 mn tons. We cut our realization assumption and tweak cost estimates resulting in a cut in our EBITDA/ton estimate by 8-13%—we estimate EBITDA/ton of ₹1,110, ₹1,210 and ₹1,270 for FY2019E, FY2020E and FY2021E. This results in a cut in our consolidated EBITDA estimate by 8-16% to ₹20.8 bn, ₹25.4 bn and ₹27.5 bn for FY2019E, FY2020E and FY2021E.
We estimate EPS of ₹15, ₹35.9 and ₹47.7 for FY2019E, FY2020E and FY2021E. The cut in our EPS estimate (66-84%) reflects higher depreciation and amortization costs (of goodwill) and the revised number of shares (increased for merged entity).
Dalmia Bharat to expand East capacity by 8 mtpa besides acquisiti
Dalmia through OCL India is setting up a new cement plant in Odisha with capacity of 8 mtpa at capital expenditure of ₹37.2 bn—the capex cost/ton works out to US$70/ton and is lower than that of peers. The company has ordered major plant and machinery for the east project. The project will be completed by FY2021/22E. As per the company, its total capacity in the east will increase to 18.2 mtpa from 9.3 mtpa at present with (1) 8 mtpa from its new project, and (2) 1.1 mtpa of acquired capacity of Kalyanpur Cement. The company expects its market share to increase to 20% from 12% now.
Other highlights from the earnings call
▶ Fiscal incentives—receipt of ₹1.8 bn in the quarter. The company received ₹1.8 bn for outstanding incentives during the quarter. The total outstanding amount was ₹11 bn and management highlighted further receipt of ₹1.3 bn in October 2018. The total fiscal incentives accrued for the quarter stood at ₹400 mn—we note that fiscal incentives have declined in FY2019 from ₹3.3 bn accrued in FY2018.
▶ Net-debt increases due to acquisition of Kalyanpur Cement. The company’s netdebt increased to ₹38.1 bn in September 2018 from ₹34.2 bn in June 2018 due to consolidation of debt of Kalyanpur cement plant. The company’s net-debt/EBITDA increased to 2X in September 2018 from 1.7X in June 2018.
▶ Capex plans. Dalmia will incur capex of ₹37 bn for expanding its capacity by 8 mtpa in the East and ₹1.4 bn for improvements at Kalyanpur cement. The capex spends in 1HFY19 was ₹3.5 bn—the company expects full year capex of ₹9-10 bn in FY2019E. Capex will increase to ₹15-17 bn in FY2020E due to payments for its East capacity expansion and to ₹14 bn in FY2021E.
▶ Pet-coke prices have declined. Dalmia’s production cost increased 5% qoq to ₹4,280/ton (+12% yoy) in 2QFY19 due to (1) slag costs increasing to ₹1,421/ton (+22% yoy, +8% qoq), and (2) pet-coke costs rising to US$103/ton (+24% yoy, +4% qoq). As per the company, pet-coke prices have declined to US$96/ton in October 2018 and will aid costs.
Highlights of the amalgamation with OCL India
▶ For amalgamation of DBL with OCL India, the shareholders of DBL (89 mn) will be issued two shares in OCL India for every one share in DBL resulting in the issuance of 178 mn shares of OCL India, over and above the existing shares of OCL India (57 mn shares).
▶ OCL India will be renamed Dalmia Bharat Ltd, even as OCL India transfers its assets into DCBL—the operating step-down subsidiary of DBL.
▶ OCL India will also cancel 42.5 mn shares of itself currently held by DCBL for 75% ownership in OCL India, resulting in net outstanding shares of 192 mn in the eventual entity.
▶ It will allow DBL to improve cash fungibility across operations, besides curtailing overall administrative costs and improving tax efficiencies.

Definitions of ratings

Our target prices are also on a 12-month horizon basis.

Other definitions

Coverage view. The coverage view represents each analyst's overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious.

Other ratings/identifiers

Copyright 2018 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved.
1. Note that the research analysts contributing to this report may not be registered/qualified as research analysts with FINRA; and
2. Such research analysts may not be associated persons of Kotak Mahindra Inc and therefore, may not be subject to NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
3. Any U.S. recipients of the research who wish to effect transactions in any security covered by the report should do so with or through Kotak Mahindra Inc and (ii) any transactions in the securities covered by the research by U.S. recipients must be effected only through Kotak Mahindra Inc at vinay.goenka@kotak.com.
This report is distributed in Singapore by Kotak Mahindra (UK) Limited (Singapore Branch) to institutional investors, accredited investors or expert investors only as defined under the Securities and Futures Act. Recipients of this analysis / report are to contact Kotak Mahindra (UK) Limited (Singapore Branch) (16 Raffles Quay, #35-02/03, Hong Leong Building, Singapore 048581) in respect of any matters arising from, or in connection with, this analysis / report. Kotak Mahindra (UK) Limited (Singapore Branch) is regulated by the Monetary Authority of Singapore.
Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house.
Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE), Metropolitan Stock Exchange of India Limited (MSE). Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management.
Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). We are registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014.
We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in last five years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise/warning/deficiency letters/ or levied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time.
We offer our research services to clients as well as our prospects.
This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions.
This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Kotak Securities Ltd. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients.
We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completeness cannot be guaranteed. Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Certain transactions -including those involving futures, options and other derivatives as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals.
Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein.
Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.
We and our affiliates/associates, officers, directors, and employees, Research Analyst(including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company (ies) discussed herein or act as advisor or lender / borrower to such company (ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of Research Report or at the time of public appearance. Kotak Securities Limited (KSL) may have proprietary long/short position in the above mentioned scrip(s) and therefore may be considered as interested. The views provided herein are general in nature and does not consider risk appetite or investment objective of particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with KSL. Kotak Securities Limited is also a Portfolio Manager. Portfolio Management Team (PMS) takes its investment decisions independent of the PCG research and accordingly PMS may have positions contrary to the PCG research recommendation. Kotak Securities Limited does not provide any promise or assurance of favourable view for a particular industry or sector or business group in any manner. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and take professional advice before investing.
The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.
No part of this material may be duplicated in any form and/or redistributed without Kotak Securities' prior written consent. Details of Associates are available on www.kotak.com
Research Analyst has served as an officer, director or employee of subject company(ies): No
We or our associates may have received compensation from the subject company(ies) in the past 12 months.
We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months: No
We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the research report. Our associates may have financial interest in the subject company(ies).
Research Analyst or his/her relative's financial interest in the subject company(ies): No
Kotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: Yes
Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report.
Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No.
Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No
Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report.
"A graph of daily closing prices of securities is available at https://www.nseindia.com/ChartApp/install/charts/mainpage.jsp and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choose a company from the list on the browser and select the "three years" icon in the price chart)."
Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051, Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com/www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No: NSE INB/INF/INE 230808130, BSE INB 010808153/INF 011133230, MSE INE 260808130/INB 260808135/INF 260808135, AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. NSDL/CDSL: IN-DP-NSDL-23-97. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing. Investments in securities market are subject to market risks, read all the related documents carefully before investing. Derivatives are a sophisticated investment device. The investor is requested to take into consideration all the risk factors before actually trading in derivative contracts. Compliance Officer Details: Mr. Manoj Agarwal. Call: 022 - 4285 8484, or Email: ks.compliance@kotak.com.
In case you require any clarification or have any concern, kindly write to us at below email ids:
● Level 1: For Trading related queries, contact our customer service at 'service.securities@kotak.com' and for demat account related queries contact us at ks.demat@kotak.com or call us on: Toll free numbers 18002099191 / 1800222299, Offline Customers - 18002099292
● Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at ks.escalation@kotak.com or call us on 022-42858445 and if you feel you are still unheard, write to our customer service HOD at ks.servicehead@kotak.com or call us on 022-42858208.
● Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Mr. Manoj Agarwal) at ks.compliance@kotak.com or call on 91- (022) 4285 8484.
● Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach CEO (Mr. Kamlesh Rao) at ceo.ks@kotak.com or call on 91- (022) 4285 8301.
First Cut notes published on this site are for information purposes only. They represent early notations and responses by analysts to recent events. Data in the notes may not have been verified by us and investors should not act upon any data or views in these notes. Most First Cut notes, but not necessarily all, will be followed by final research reports on the subject. There could be variance between the First cut note and the final research note on any subject, in which case the contents of the final research note would prevail. We accept no liability for the contents of the First Cut Notes. For further disclosure please view https://kie.kotak.com/kinsite/index.php