Dalmia Bharat Limited (DALBHARAT) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the conference call on business update of Dalmia Bharat Limited. Please note that this conference will be for 30 minutes and for the duration of this conference call, all participant lines will be in the listen-only mode. This conference call is being recorded, and the transcripts of the same will be put up on the website of the company. [Operator Instructions] Before I hand over to the conference to the management, I would like to remind that certain statements made during the course of this call may not be based on historical information or facts and may be forward-looking statements. These statements are based on expectations and projections and may involve a number of risks and uncertainties such as the actual outcome that may differ materially from those suggested by such statements. I now hand the conference over to Ms. Aditi Mittal, Head of Investor Relations. Thank you, and over to you.

Thank you, Mike. Good morning, everybody. Thank you for joining in for our call today to discuss the divestment of our refractory business. Would request all the participants on the call to kindly restrict the questions to this subject and refrain from asking anything pertaining to our financial performance and earnings. We can take up all such performance-related questions during our upcoming earnings call, which will be scheduled after a Board meeting of FY '23. With this, I will now hand over the call to Mr. Dalmia for his opening remarks. Thank you, and over to you.

Thank you, Aditi. Good morning, everyone. Thank you all for joining in at such short notice. Before sharing with you the details regarding the purpose of this call, I would like to spend a few minutes to reiterate our thinking and the context which I have shared with you earlier in several conversations. We have deep conviction on the Indian growth story and are bullish that the cement sector would be a direct beneficiary of this for multiple decades. During and post COVID, India has displayed its resilience and has come out stronger than all major world economies and my conviction in the India growth story has only become stronger. The Indian economy is undergoing a large-scale metamorphosis with millions of people coming out of poverty. A young, ambitious and massive middle classes will drive a consumption and housing boom. Further, rapidly building world-class infrastructure is a defining lever to achieve India's ambition of becoming the world's third largest economy during the Amrit Kaal. We have seen the budget CapEx number of INR 7.5 lakh crores last year and INR 10 lakh crores this year. I believe that infra in housing will drive a robust growth in cement demand over many decades. We have already seen outstanding results by betting on this strategy that cement is a proxy debt on India's growth. Our capacity grew from 1 million tonnes in 2004 to 40 million tonnes in 2023. Dalmia growth will continue to accelerate as India accelerates. We have planned to be 75 million by 2027. And in the next 4 years, we will add almost what we added in the last 20 years. To capitalize on this multi-decade growth in cement demand, we created a Vision 2031 for Dalmia Bharat and made a long-term capacity creation plan of 110 million to 130 million tonnes by 2031, which translates into a 15% CAGR. As an entrepreneur, I'm acutely aware that our strategy, right? Any other growth strategy requires strong discipline, discipline in capital allocation and discipline in execution. We backed up our CapEx plan with a very robust capital allocation framework, which was the first of its kind for an Indian cement company. This growth plan and capital allocation framework has 3 defining features. One, Dalmia Bharat will be a pan-India pure-play cement company. Two, we will have significant presence in every market that we operate in. And three, we will pursue this growth with a strong balance sheet, keeping net debt to EBITDA less than equal to 2. We could temporarily surpass this ratio for very strategic inorganic opportunities, but our company would make all efforts to bring it back to less than 2 over the next few years. Along with the capital allocation framework, we had also committed that we will divest our noncore assets over time, primarily the stake in IEX, Hippostores and the Refractory Division. In line with this stated commitment of building a pure-play cement company and containing our net debt-to-EBITDA less than 2, we started divesting our noncore assets. We began by divesting our stake in IEX and reduced our stake from 20% to above 15% and realized INR 614 crores. We also divested Hippo Stores in December '21 through a slump sale to a promoter entity for INR 155 crores. With a veto build scale, sharpened management focus and create value, we combined DCBL's refractory business, which we had received along with the acquisition of OCL with a group entity called Dalmia Refractories Limited and created a pure-play refractory company in financial year '22 called Dalmia Bharat Refractories Limited DBRL. This was done to create value by creating a pure-play company and building scale. Our investment thesis indeed played out and backed by the terrific execution of our refractory team, we sold the India business of DBRL to RHI Magnesita in January 23, at an EV to EBITDA of 24x, which is one of the highest in the sector. The consideration of the same was received in RHI shares and also some small portion of cash. The consideration received by DBRL in the form of RHI shares now constitutes about 14% shareholding of RHI India and is locked for a period of 6 months until about August 23. Since DBL wants to finance its cement growth with a super strong balance sheet and monetize its noncore assets the Board of DCBL on Saturday 25th March has approved the sale of its entire 42.36% holding in DBRL. Accordingly, DCBL has entered into a binding agreement to sell its entire shareholding in DBRL to a promoter group company called Sarvapriya Healthcare at a consideration of INR 800 crores. The transaction will be consummated over the next 30 days in April 2023. I will now hand over the call to Mr. Singhi and our CFO, to take you through the details of the transaction. Over to you, Mr. Singhi. Thank you.

Thanks Puneetji. Happy morning friends continuing on what Puneetji has said, we are fully committed to carry out our growth plan of 110 million to 130 million tonnes by 2031. We are very much confident that we'll be able to achieve our target of 49 million tonnes by March 24, 75 million tonnes by FY '27. Friends I'm very happy to share that we are not only meeting our first milestone of 49 million tonnes in time. But with the Jaypee acquisition, we will be exceeding it by reaching to almost 54 million tonnes by March 24. Friends, we are in the midst of completing the formalities for the Jaypee acquisition which marks our entry into the central region of the country. The agreement for the first tranche of Jaypee acquisition is already signed, and we are now in the advanced stage for completing the balance work. We will also be formally sharing an update with you on the same as soon as we are able to close it. As we bid our capacity to 110 million to 130 million tonnes building us raw material security and fuel security will be another area of focus. During the quarter, we have won auction for another coal block in Mandla North in MP and which when operational will add to both flexibility and supply and efficiency in the cost. Friends, as we build a pan-India pure-play cement company, we also ensure that our balance sheet remains always strong. The divestment of IEX, Hippo Stores and now the Refractory business, is a step in the right direction. And this will help in financing of our growth plans. Now I would request our CFO, Sri Dharmender, to take you through the final details of the reflective divestment. Thanks all the best.

Thank you, Puneetji and Singhiji. Good morning, everybody. As mentioned by Puneetji and Singhiji, the Board of DCBL in their meeting held on 25th March has approved the sale of its entire shareholding in DBRL. Accordingly, DCBL has subsequently entered into a binding agreement to sell its 42.36% stocks and stake in DBRL to a promoter group company called Sarvapriya Healthcare Solutions Private Limited. At a consideration of INR 800 crores. The transaction is scheduled to be consummated over the next 30 days in April 2023. Further, the payment consideration for the same will come in as follows: 20% of the transaction value, that is INR 160 crores will be realized by DCBL within April '23, the balance consideration of 80%, that is INR 640 crores they'll be converted into NCDs, which will carry an interest rate of 8.5% per annum. These debentures will be redeemable in 2 tranches. The first one will be redeemed in December '23 and the remaining 40% will be redeemed in September '24. In December '23, when the first tranche of this debenture is redeemed we will not only get cash inflow of INR 320 crores from DBRL shares divestment. But we will also be receiving the INR 120 crores, which is due from the redemption of debentures of Hippo stores. Thus, the combined cash inflow to the company from both these divestments will look like as follows: INR 160 crores in April '23 for sale of shares of DBRL, INR 440 crores in December '23 from redemption of debentures issued against sale of DBRL shares and Hippo stores business and INR 320 crores in September '24 from the remaining debentures issued against DBRL shares divestment. Additionally, you can expect that we will gradually be divesting our stake in IES as has already been reiterated both by Puneetji and Singhiji. Our guidance given through the capital allocation framework remains our key guiding document and we will continue on our capacity growth journey within the boundary conditions of the framework. With this, I now open the floor for question and answers. Thank you very much.

Will now begin the question-answer session. [Operator Instructions] We have the first question from the line of Prateek Kumar from Jefferies.

Congratulations for closing the deal. My question is on -- while we have highlighted the time line of closure of this deal is there any chance of like this or not getting closed both in terms of payment upfront as well as future? Were any changes expected?

Sorry, can you repeat that question? So what I understood was that is there any risk of this not happening? So the answer is no.

More in terms of time lines as well as in terms of payments?

No. I think the time lines of the execution, which I said are 30 days from now as scheduled to happen as are the payments as per the schedule, which happened, it will happen. We don't foresee any risk on this.

Mr. Prateek, if I can just elaborate on the reasons for this time line to give more comfort I think the first tranche of 30 days is finally because of the fact that you could give instructions of feeds for [indiscernible]. And by the time that sales is over, didn't get to sell for this level. So I think the legal advice that we received was that we should be not be doing transfer of shares during the current period. So once the DBRL board meeting is over and the silent period is over we will be able to execute the transaction. So that is the reason why there is a delay. The second time is because RHI shares are locked in for 6 months till August, and we hold almost 15% of shares of RHI India. So I mean it takes some time because there's cash flow being generated within the DBRL business, right, because they have shared a little bit of efficiency used exclusive. So I think the timeline has been designed based on that to ensure that there is enough cash flow in DBRL said this one. So I think there's no doubt in our mind that we will deal which is fine do some [indiscernible] entity and we fine Hippo stores and we've got all the interest payments and we are expecting the final payment in December. So almost, I will give you more doubt at all this is a fine agreement. This is a binding agreement. So there is no question about it.

And my second, just one more question on -- on valuation, so how does it -- the dilution of the promoters compared to what we transferred at and what was the stake happened and what was the transfer of our that the Dalmia Cement to Refractory earlier and then to sale to RHI entity. So how does all these valuations compare?

So as you recollect that Indian business of Refactory was transferred or sold by DBRL to RHI on slump sale basis, and they got INR 2.7 crores shares of RHI and about INR 400 crores cash. Now the remaining business left is small and subscale businesses in Germany and China, which are also in the process of being divested. DBRL also holds about INR 125 crores worth of DBL shares. And there are small assets as well as tax liability on the slump sale transaction. And other transaction costs liabilities, which has also been factored into what arriving at the value and DBRL has also given indemnities up to INR 1,500 crores for any unforeseen undisclosed liabilities. The business indemnities are for a period of 27 months, while tax related are for 7 years, while fundamental and limited are for 11 years. So the Board had appointed Finvox Analytics, a registered valuer to assess the fair market value of these all stake. And we have also taken opinion from D&A Financial Services, a category 1 merchant banker. On the fairness of value arrived at by the valuation from. And the valuers have considered all these aspects, which I described a short while back and valued the company at INR 1,876 crores, based on which the management has recommended and the Board has also decided to sell the stake at INR 800 crores, which is 42.36%.

And maybe I can also say at what business was it transferred when we created a pure-play refractory company? And what has been the growth since then?

So when we transferred it, it was at INR 356 crores. And the current carrying value as of December end, we are carrying value at about INR 402 crores after factoring in the core income earned by this company. So when we transferred our business to DBRL, it was at INR 56 crores as part of the slump sale demerger or a scheme which was done. And the last carrying value of 31st December was INR 402 crores. And against this, now we are selling these at INR 800 crores.

Thank you. We have the next question from the line of Indrajit Agarwal from CLSA.

Now as you mentioned there, the carrying values is INR 400 crores and INR 800 crores is the realization. So is there -- profit on the books of INR 400 crores. So what is the tax implication both on P&L and also on cash flow because of this?

INR 800 crores, minus INR 402 crores, that is roughly INR 398 crores will be the profit in March accounts because now these investments will be held for sale and at relevel value. And the tax implication of this gain will be close to about INR 50-odd crores, which will get paid in the next financial year when the actual consummation of the transition happens. This will be a long-term capital gain.

So the P&L and cash flow, both impact will be in FY '24 accounts. Is that correct?

No, I'd say that the P&L will come in the current year itself, and the P&L, which you'll recognize will be post tax, but the actual tax outflow will happen in the next financial year when the deal gets consummated. But the impact has to be taken in the current year itself in our books.

Thank you. We have the next question of the line of [ Viraj Kacharia ] from Securities Investment Manager.

[indiscernible] Am I audible?

Yes we can hear you.

Yes, So just 2 questions. So the deal which we had with RHI, the book value was around INR 400 crores upon transfer the overall we put was around INR 2,100 crores, including the 440 but then we kind of transfering monetizing this particular stake in Dalmia Bharat Refactory, the overall value we have put it somewhere around 1876. Why is there a difference?

Question with I see what you are seeing INR 2,100 crores that you're talking about, it's a Asia business, right? On top of the Germany business and the China business but -- so when the interest tariff on is much higher than what you're talking I think a picture you actually do have some sort of assets to the, there. Is an income which is booked in the books of DBRL and they have to pay taxes on that, right? So net-net we have looked at all the processes including those related to the transaction costs. So after considering all the factors, it [indiscernible]. It's not that whatever you earn by selling because there is taxes on that, expenses, the merchant [indiscernible] So when you consider all of that [indiscernible] it's a net value.

Okay. Two questions. So post this transaction the way we have structured the deal. The funding for the deal will be realized by sale of shares of RHI partial sale of that RHI once the lock-in is completed. Aam i right thinking that?

So sales of RHI are held by DBRL. We have sold our entity to a promoter entity. Now it is on promoter to finance this deal and they will finance it from their sources. So there could be some partial divestment of RHI. I think that is something which we will not comment on. We enter a deal with a promoter entity, [indiscernible] and the money will come from promoter not from DBRL.

Yes. So the reason why I'm asking is post this, we will still be only somewhere close to 58% in DBRL. So that's the reason I was asking how they are funding this. And second question I had was RHI has recently kind of in announcement on QIP close to 10% or [ INR 270 ] crores and -- so in that trend, how are we looking in terms of our role in the -- for our stake in RHI because we will be one of the co-promoter in that entry?

[indiscernible]. I am a pure play cement company. I have exited my stake it in the Refactory business to a promoter entity. Now I have nothing in the Refactory business from today on. So what is the future prospects of the Refactory business in India? How are RHI looking at it? How promoter will fund it, how much sales have structured. You can be fine because I'm not concerned about that, right? I'm running a pure-play cement company. I believe in the future of that, I believe in the future successes in cement sector and that is what we are focusing on. So all the questions about Refractory, it is not part of our consideration right now.

Just to also add that we are not co-promoters in RHI. So it's just a financial stake, which we got through the sale of business, and we have no management right there. We are not a strategic player there. So it's just a financial investment which will get divested in due course.

[Operator Instructions] We have the next question from the line of [ Vivek Kumar ] from Shiv Sagar Investments.

I have 2 questions, sir. First, we took 18% of stake in Indian firm RHI India. So could you have taken a stake in the parent because I think the parent is selling at a lower market cap on the Indian firm...

Let me answer your question. So it's very difficult to agree on refractory business in India. So there are many considerations but it is not about what we want...

But we could have bought 18% in the global company, the parent.

I could say I want the parent company, I want [indiscernible]. It's a negotiated deal, there is a seller, there's a buyer, right? It is very easy to say that why couldn't we do this and why couldn't we do that. Fact is, like Puneet was saying [indiscernible], we got a fantastic deal. How many companies in the refractory business today are able to divest the business at almost 25x in the EBITDA multiple? Hardly any. Even if you look at the real valuation of refractory business on the side. So maybe appreciate that the management team of refractory business [indiscernible].

But we are getting the stocks of RHI India. That could be inflated due to market -- the stocks can fall. So yes, it is helping us share stock so.

But again look at it, as on the cement business I'm not taking the risk, right? -- we have exited the business, now the risk is -- again because there's a buyer and seller in every transaction. We want to build on the pure-play cement company, we have executed the refractory business...

Yes. I was just looking from the group point of...

No, this is not group, family entity. We are representing Dalmia Bharat Limited.

No, the overall Dalmia Group, I was just thinking on that to why couldn't [indiscernible] RHI global company for the [indiscernible].

Fair question. I think we should -- when we have a discussion on Dalmia Bharat Group, a good strategy and promoter strategy, we should definitely discuss that but not in...

Second question, sir, why couldn't we have given the shares of Dalmia Bharat Limited, get it listed to the shareholders on Dalmia like could this have been done like getting listed, the Dalmia Bharat Refactory Company is getting listed?

Multiple options were explored when we were looking at it as always, you have a view, a particular view of shares [indiscernible]. Second is why would somebody in the cement business over [indiscernible]. I think it's a long chain, right? So I think the purpose, so the purpose is not to give the return to shareholders, purpose was to generate enough cash to be able to flow back in to the business...

Yes, I got your point. You wanted cash in Dalmia Cement to [indiscernible].

So I want to grow the business. If I don't use the cash, I will give it back to the shareholders, right? But if I have use of cash and I want to invest for the future, I would want to flow the money back into the DCBL balance sheet.

So do you plan to list Dalmia Bharat Refactory at a later time, in 1 or 2 years?

Again, Dalmia Bharat Refractory business is now a promoter-owned company. I think the question is not for us to decide how they plan to run the company and how they plan to run -- it's very difficult for me to answer this question.

Thank you. That was the last question. I would now like to hand it over to Mr. Dalmia for closing comments.

Thank you very much for joining at short notice. We appreciate your interest, and we appreciate your feedback. Thank you very much. We look forward to talking to you again after the full financial year, '23 results are closed, and we can share our outlook for the whole year and the future in that one. Thank you. Have a good day.

Thanks, everyone. Thanks.

Thank you. On behalf of Dalmia Bharat Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.