Buy Dalmia Bharat; target of Rs 2384: Motilal Oswal

DBEL and OCL India in their respective board meeting on 5th November 2016 approved the amalgamation of DBEL with OCL. Post amalgamation, OCL would be renamed as DBEL. The proposed merger ratio of 2:0 was derived on the basis of fair valuation – weighted average of three valuation techniques: 1) Discounted cash flow, 2) EV/tonne and 3) Market price. This would result in issuance of 177.6m new shares by OCL to DBEL’s shareholders. Additionally, there would be cancellation of 42.5m shares of OCL held by Dalmia Cement Bharat Limited. The resultant equity shares of the merged entity would be 192m.

Management’s focus on one listed entity over past 12 months has given investors more comfort in the group structure and resulted in multiples expansion for the company. Concerns about high gearing (net debt/EBITDA of 4x) should abate with steady asset sweating and disciplined capital allocation. Due to moderating capex, we expect net debt/EBITDA to improve to less than 3x by FY18. With strong profitability and growth, DBEL has seen the first round of re-rating. At EV of 10.4x FY18E and USD156/ton, the stock is trading at discount to peers. With the conclusion of most large asset sales in India, the potential risk of increase in debt by way of asset acquisitions has mitigated. Deployment of incremental free cash generation toward debt reduction would drive the next phase of re-rating. We value DBEL at EV/EBITDA of 12X FY18E or INR 2,384/share.