Review of results for Dalmia Bharat, Mahindra & Mahindra Financial Services

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Dalmia Bharat (NS:): We maintain our BUY rating on Dalmia Bharat (DALBHARA), with an unchanged TP of INR 2,145/sh (13x its September consolidated EBITDA at 24e). We continue to like DALBHARA for its strong volume and margin outlook as well as its conservative balance sheet. Dalmia recorded healthy volume growth (+13% year-on-year). However, the margin contracted due to continued cost inflation and lower than normal cost pass-through. Unit EBITDA was INR 656 per MT (down 46/30% YoY/TQ). The increased mix ratio and increased green energy/fuel consumption dampened cost inflation. The company said fuel costs will decline 10% quarter-on-quarter in the third quarter.

Mahindra and Mahindra (NS:) Financial Services Ltd (NS:): MMFS adjusted earnings were around 11% higher than our estimates due to the impressive recovery in asset quality. The stressed pool (GS-II + GS-III) further decreased to 16.4% (peak level of T1FY22: 34.8%), due to relentless collection and recovery efforts and improved economic activity. According to management, the differential between GNPA (IRAC standards) and GS-III (IND-AS) has been reduced to INR 9 billion (1.2% of advances) and requires limited additional provisioning. MMFS continued its strong business momentum with disbursement growth of +83% YoY, driving loan growth of 16% YoY. While asset quality and balance sheet growth results were strong, MMFS experienced further NIM compression and higher operating intensity amid a rising cost of funds and its three-year journey to product/customer diversification. We remain skeptical of the company’s ability to simultaneously deliver growth, profitability and asset quality results in this time frame. We are adjusting our earnings estimate for FY23/24E to reflect lower credit costs and maintain ADD with a revised SOTP based TP of INR 224 (previously INR 225), implying 1 .5 x ABVPS ​​Sep-24.

Dalmia Bharat

Sound sample volume; cost pressure weighs on the margin

We maintain our BUY rating on Dalmia Bharat (DALBHARA), with an unchanged TP of INR 2,145/sh (13x its consolidated EBITDA of Sept-24e). We continue to like DALBHARA for its strong volume and margin outlook as well as its conservative balance sheet. Dalmia recorded healthy volume growth (+13% year-on-year). However, the margin contracted due to continued cost inflation and lower than normal cost pass-through. Unit EBITDA was INR 656 per MT (down 46/30% YoY/TQ). The increased mix ratio and increased green energy/fuel consumption dampened cost inflation. The company said fuel costs will decline 10% quarter-on-quarter in the third quarter.

Q2FY23 performance: Strong volume growth of 13% YoY (-7% QoQ) driven by capacity ramp-up. Utilization was 63% versus 66/67% YoY/QoQ. NSR fell 3% QoQ (a seasonal drop in prices). Operating Expenses increased by 16/2% YoY/TQ due to higher unit input costs (up INR 100/MT QoQ: higher blend and fuel prices) and other expenses. Thus, unit EBITDA contracted by 30/46% QoQ/YoY to INR 656 per MT. While consolidated revenue increased 15% YoY on healthy volume growth, EBITDA/APAT fell 39/74% YoY due to high cost inflation.

S1FY23: Consolidated EBITDA fell by 28% year-on-year to INR 9.7 billion, driving OCF down by 46% to INR 4.1 billion. Capital expenditure continues to accelerate, up 55% YoY in H1FY23 (up 16% from H2FY22) to INR 11.6 billion. Gross debt increased by 6% (vs Mar 22) to INR 34 billion but remains comfortable.

Capex and Outlook: DALBHARA spent INR 12 billion in CAPEX during H1FY23 and guided INR 30 billion/35-40 billion CAPEX for FY23/FY24E, expanding to 49 mn MT d here FY24E. It plans to reach a cement capacity of 70-75 million tons by FY27E. The company is also increasing its WHRS/solar capacity to 72/101 MW by March 23 from 31/32 MW in March 22. It further plans to add 155 MW of renewables in FY24. , which will bring its share of green energy to 36%, compared to 24% currently. DALBHARA is also increasing its sales of blended cement. These should encourage a rebound in its margin and also reduce its carbon footprint (already the lowest specific CO2 emission rate in the Indian cement industry). The company has indicated that its fuel cost will decrease by 10% QoQ in Q3FY23. We are maintaining our EBITDA estimates for fiscal years 23/24/25E.

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