Brokerage house Nirmal Bang Equities Pvt Ltd has a strong 'buy' recommendation on Dalmia Bharat Ltd, with a target price of ₹2,510, indicating a 35% growth in value for the stock from the current market price of ₹1,853.
The brokerage also expects a re-rating on the stock due to the company's solid growth visibility, improved balance sheet, and attractive value.
Dalmia Bharat is India's fourth-largest cement producer with an annual cement capacity of 37 metric tonnes per annum (MTPA) and a power capacity of 195 megawatts (MW).
In the building materials sector, it has developed into one of the most reputable companies. There are 14 production facilities and units spread out across the entire nation, with the exception of the north. Through its above-the-line (ATL) and below-the-line (BTL) marketing initiatives, the business has been able to preserve a strong brand equity and brand recall.
Let's look at the top five reasons cited by the brokerage firm for investing in the stock:
Capacity expansion to boost growth and improve its market position
According to the brokerage, the company has aggressively expanded its capacity in brownfield, greenfield, organic, and inorganic ways while focusing on areas where it can increase its market share. Over the course of FY23-FY25E, the business would invest roughly Rs70-80 billion in growth capital expenditures (capex). With the purchase of Murali Industries Ltd, the business can access a crucial market in western Maharashtra. In order to expand its presence in North, the business is at different stages of land acquisition in several states, particularly Central North.
Efficient cement producer
Given the availability of raw materials in close proximity and the growing use of alternative fuels like pet coke and biomass, the company has one of the lowest lead distances, thanks to higher blending and elevated cement-to-clinker ratios as well as plant modernisation and upgradation resulting in industry-leading reduced power usage.
The company's operational efficiency gives it a significant cost advantage over its rivals in the context of a strong demand outlook, increasing utilisations, and a stable price environment.
"The company has a track record of robust operational cash flows, which have increased from ₹12.3 billion in FY15 to ₹25 billion in FY22 (CAGR of 10.6%). We expect the company to become debt-free (on net basis) in FY30E in the absence of additional capex projects and a healthy balance sheet," said the brokerage.
Capital expenditure (capex) update
The company is on pace to increase its capacity to 49 MTPA by FY24E, according to the brokerage's report. With a total capacity of 70–75 MTPA by FY27E and 110–130 MTPA by FY31E, it also has long-term intentions to dominate the cement market in all of India. Its current capital expenditures (capex) strategy calls for the continuous addition of 7.75 MTPA across Bihar, Odisha, and Maharashtra (commercialised in January 2022).
Divesting stake in Dalmia Bharat Refractories (DBRL)
"In line with its strategy to exit non-core business/investments, the company exited its remaining stake (42%) in DRBL for ₹8 billion on March 25, 2023. The management has highlighted that the proceeds from this sale would be utilised in the ongoing capex," said the brokerage.