Company Background
Dalmia Bharat Enterprises Ltd (DBEL) is a diversified group having
interests in cement, power and refractories. It has cement plants in
southern states of Tamil Nadu (Dalmiapuram and Ariyalur) and Andhra
Pradesh (Kadpa) with a total capacity of 8.2 million tonnes per annum
(mtpa) along with 72 MW captive power plants. It is a pioneer in super
specialty cements used for oil wells, railway sleepers and air strips.
Investment Rationale
One of the largest players in Southern India
DBEL is among the top six cement manufacturing groups by
capacity in Southern India, with an installed capacity of 8.2 mtpa. It
also holds 45.37 percent stake in OCL India Ltd (dominant player in
Eastern India), having an installed capacity of 5.4 mtpa along with
54 MW of captive power plants.
��
Cement demand in South India to pick up
Over the last few years, Southern India has witnessed an over
capacity scenario owing to commissioning of ~70 mtpa (CAGR of
~20 percent) of new capacity during FY07-12, while demand has
remain subdued in the range of ~4 percent.
Going ahead, we believe that Southern India would add
effective capacity of ~21 mtpa over FY12-15E at a slower CAGR
of ~5 percent while incremental demand is expected to
increase at a CAGR of ~6 percent.
Capacity expansion plan to aid volumes
The company is implementing a Greenfield expansion of 2.5
mtpa cement plant at Karnataka along with 45 MW captive
power plant at a total cost of approx. INR 13.0 billion
(excluding cost of captive power plant) which is expected to be
completed towards the end of Q4FY14E.
OCL India is setting up 1.5 mtpa grinding unit at Medinipur,
West Bengal for a total cost of INR 5.0 billion which is expected
to get commissioned by November 2013.
Strong balance sheet to drive growth
The company is likely to fund most of its expansion through internal
accruals. During FY12-14E, DBEL is expected to generate cash
flow from operations of ~11.15 billion, which would be utilized as
capex and towards repayment of debt.
Valuation
We rate a BUY rating on DBEL with a price target of INR 158.6/share,
implying an upside potential of 36.2 percent from current levels. Our
target price is based on SOTP valuation of DBEL’s FY14E EV/EBITDA
multiple of 3.75x and DBEL’s OCL India stake at FY14E EBITDA
multiple of 4x.
Industry Overview
Cement Industry
During FY02-12, the effective installed capacity of the cement
industry increased at a CAGR of 9.0 percent from 129.7 MT to
~308 MT. During the same period, while there was significant
decline in capacity utilization, production growth also
underperformed capacity growth by growing at a CAGR of 8.2
percent.
Actual cement production in FY12 was ~224 MT as against ~211
MT in FY11, registering a growth rate of 6.4 percent. Cement
utilization during the same period stands at ~73.0 percent as
compared to ~75.2 percent reported in FY11.
In 2010, global cement industry stood at ~3,100 MT, with China
accounting for nearly half of the total output. India is the second
largest producer with approximately 308 MT of cement (as on
March 31st, 2012).
India’s per capita consumption is at 176 kg against the world
average of 433 kg or China’s 1,210 kg. India is way behind the
global average per capita consumption and this process of catching
up with International average would drive the growth of Indian
cement industry.
In India, demand from infrastructure has increased but supply has
remained the same. Moreover, in the 12th five year plan,
Government has planned the spending of over INR 40,992 billion
on infrastructure against INR 20,542 billion in 11th five year plan.
Hence, massive investment in infrastructure would provide boost to
the Indian cement industry.
Refractory Industry
The growth of the refractory industry is dependent on the growth of
steel industry which consumes ~75 percent of the total refractories
produced. It is expected that world steel production will grow at a
CAGR of 2.6 percent by 2015 resulting in strong demand of
refractories going forward. Increase in capacity additions by major
steel producers around the world will further increase demand for
refractories.
In India, refractory industry is fragmented with very few organized
players. Production capacity of refractories in India is currently
around 2.5 million tonnes. Presently, capacity utilization in the
refractory industry has been moderate as a number of capacity
expansion programmes in the steel industry has been deferred.
However, with the thrust of the government on developing
infrastructure, we expect steel industry will grow at a robust pace
going forward. Growth in steel industry is likely to translate into
healthy demand for refractories in the future.
Cement demand in South India to pick up
Over the last few years, Southern India has witnessed an over
capacity scenario owing to commissioning of ~70 mtpa (CAGR of
~20 percent) of new capacity during FY07-12, while demand has
remain subdued in the range of ~4 percent (negative growth during
FY11 and FY12). The slowdown in cement offtake was on account
of slowdown in Andhra Pradesh post political crisis.
Recently, despite oversupply scenario prices have remained firm
as the rate of capacity growth is slowing since it is getting
increasingly difficult to acquire good-quality limestone coupled with
longer gestation periods (acquiring land has become time
consuming & expensive). Thus, demand supply situation is moving
in favor of producers as new plants are more difficult to set up.
With increase in affordable housing schemes, pick-up in
construction activity in Andhra Pradesh and benefits accruing from
a further fall in interest rates, we expect demand-supply scenario to
improve. Going ahead, we believe that Southern India would
add effective capacity of ~21 mtpa over FY12-15E at a slower
CAGR of ~5 percent while incremental demand is expected to
increase at a CAGR of ~6 percent.
Capacity expansion plan to aid volumes
The company is implementing a Greenfield expansion of 2.5
mtpa cement plant at Karnataka along with 45 MW captive
power plant at a total cost of approx. INR 13.0 billion
(excluding cost of captive power plant) which is expected to
be completed towards the end of Q4FY14E. The funding for the
same will be done through a mix of internal accruals and debt.
After the completion of the expansion plan, DBEL’s total cement
capacity would stand at 10.7 mtpa. Translation of these capacities
into volume growth would help the company to increase its top‐line
growth, even in a softening realization situation. To improve its
efficiency DBEL has setup railway siding at Kadapa, Andhra
Pradesh which going forward, would result in deeper market reach
and lower logistic costs.
Its associate company, OCL India is setting up 1.5 mtpa
grinding unit at Medinipur, West Bengal for a total cost of INR
5.0 billion which is expected to get commissioned by
November 2013. OCL India has recently commissioned a 10 km
cross country belt conveyor for transportation of limestone from
mines to plant. The company has also commissioned one CPP of
27 MW in September 2011 and another CPP of 27 MW is expected
to get commissioned by end of H1FY13E at Rajgangpur plant,
Orissa. Post commissioning, the plant will improve the cost
efficiencies and after meeting the requirement, surplus power will
be available for sale.
Strong balance sheet to drive growth
Post restructuring in April 2010, a combination of robust earnings
and judicious investments have resulted in DBEL enjoying good
returns relative to the industry. For the year ended FY12 its sales
have grown at 33.5 percent y-o-y to INR 23.3 billion while adjusted
PAT increased by 6.3 percent y-o-y to INR 1.43 billion.
Going forward, we expect the sales to grow at CAGR of 14.3
percent over FY12-FY14E to INR 30.46 billion while net profit is
expected to grow at CAGR of 55.0 percent to INR 3.44 billion
during the same period.
During FY11, DBEL sold 15 percent stake in its subsidiary
company DCBL, having a cement capacity of 8.2 mtpa to PE firm
Kohlberg Kravis Roberts (KKR) for a total consideration of INR 5.0
billion. DBEL has an option to raise another INR 2.5 billion by
selling further stake to KKR. Thus, DBEL is well placed to meet its
additional capital requirement enabling it to consolidate its existing
market position and pursue attractive organic and inorganic growth
options as and when opportunities arise. DCBL also holds 26
percent stake in DCB Power Ventures Ltd, having an installed
thermal power capacity of 72 MW.
During FY12-14E, DBEL is expected to generate cash flow
from operations of ~INR 11.15 billion, which would be utilized
as capex. Its low leverage balance sheet (Debt/Equity ratio of 0.63
in FY12) should also enable DBEL to capitalize on organic growth
opportunities.
Recent Developments
OCL India Lanjiberna Mines
In December 2011, the Deputy Director of Mines, Orissa banned
OCL India (associate company) to mine limestone from its
Lanjiberna Mines, which impacted Q4FY12 performance. However,
in April 2012, OCL India has received provisional approval to mine
limestone from its mines for one year and mining has resumed. The
company expects the final mining approval in next few months.
Not penalised in CCI investigation
DBEL and its associate company OCL India Ltd was not penalised
by the Competition Commission of India (CCI) for cartelisation. In
June 2012, CCI levied a penalty of ~INR 63 billion on 11 cement
companies due to violation of the provisions of the Competition Act,
2002, which deals with anti-competitive agreements including
cartels. Thus, we believe DBEL to be re-rated going forward.
Key Concerns
Soaring raw material prices
Rising raw material prices (lime stone and gypsum) and increasing
power and fuel cost poses a major threat. Limestone and gypsum
are on the increasing trends over the past few quarters. While
prices of limestone have increased due to increase in royalty
payments to Government of India, its impact is limited as DBEL has
captive limestone reserves. Over the last couple of months,
international coal price has softened by ~23 percent and is
expected to fall further. Though, the depreciating rupee has limited
its gains.
Ongoing Telangana agitation
Ongoing Telangana agitation in Andhra Pradesh has impacted
demand for the second year running. The problem may continue
going forward and may exert further pressure on demand and
operating rates where DBEL has major presence
Valuations
Cement being a commodity is exposed to vagaries of business
cyclicality, feeling the heat of high commodity prices, slowdown in
infrastructure spending, higher interest rates etc. Thus, valuing the
company on P/E and DCF won’t be the right methodology, as earnings
are very volatile and there will be lot of subjectivity involved in the
assumptions, which may prove to be wrong looking at the abrupt
change in the cycle. Thus, we have valued the company on the basis of
EV/EBITDA multiple.
EV/EBITDA Multiple
DBEL is trading at an EV/EBITDA of 4.66 and 3.61x FY13E and
FY14E EBITDA respectively. We valued DBEL’s business at FY14E
EV/EBITDA multiple of 3.75x and DBEL’s OCL India stake at FY14E
EBITDA multiple of 4x. Thus, we arrived at a price target of INR
158.6/share, implying an upside potential of ~36.2 percent in 18
months. We initiate coverage on DBEL with BUY rating.
No comments:
Post a Comment