Tuesday, November 10, 2015
Marginal weakness QoQ in operating performance due to seasonality; await demand recovery for better performance
Dalmia Bharat Ltd’s (DBEL) 2QF16 operating performance came steady, bolstered by cost savings that negated the decline in realizations QoQ (the results are not comparable YoY due to consolidation of the business). The volumes declined 7.8% to 2.85MT (vs. 3.09MT in 1QF16) due to heavy monsoon in the East and some of DBEL’s other markets. However, the fall in realizations was relatively small by 3.6% to Rs4,837/tonne vs. Rs5,015/tonne due to subdued market condition in the East and North Eastern market. Consequently, net sales declined 11% to Rs13.98bn vs. Rs15.7bn in 1QF16. Notably, the cost/tonne declined 1.3% YoY to Rs3,871/tonne due to the fall in fuel and logistic costs during the quarter. Fuel cost/tonne declined 2% QoQ to Rs775/tonne which can be attributed to the softening fuel prices and increase usage of pet coke during the quarter. DBEL used 71% of pet coke in 2QF16 vs. 64% in 1QF16. Logistic cost/tonne declined 6%QoQ to Rs786/tonne due to lower diesel prices. Raw material cost/tonne declined 7% QoQ to Rs826/tonne. The dent in realizations dragged EBITDA/tonne to Rs1,122/tonne vs. Rs1,244/tonne in the same period last year. Consequently, EBITDA and EBITDAM came at Rs3.36bn and 23.3% vs. Rs4.01bn and 24.9% in 1QF16. Reported PAT fell 55% QoQ to Rs188mn from Rs416mn in 1QF16.
Earnings estimates revised: We have revised our full year estimates for F16e, following the better-than-estimated 1HF16. Our revised EPS for F16e is Rs16.4/share( earlier Rs14.2). However, we have maintained our F17e estimates, factoring in a steadier operating performance and higher volume from new facilities, as they stabilize and contribution from realizations. We have also factored in the depreciation and interest cost expenses linked to the new facilities that will also kick in. Our earnings estimates are maintained at Rs32.9 for F17e. We expect full stabilization of the new units and demand revival strongly contributing from F17 and continue further. We have also introduced F18 earnings estimates with an EPS target of Rs43.6/share.
Valuation and recommendation: We continue to value DBEL on a replacement cost method basis, with a base cost assumption of Rs7.5bn/MT. The stock is currently available at a replacement cost of Rs6.33bn/MT based on 1-year forward capacities. The stock is available at a 15% discount to the replacement cost. We believe the stock is available at fair valuation and have reduced the discount factor from 25% to 15%, as we expect demand improvement, higher volumes from new facilities and tail operating capacity efficiencies to boost DBEL’s performance. We maintain our TP of Rs706/share and HOLD rating.