Mumbai: As part of a plan to put one of India’s oldest business groups back on the growth track, Puneet Dalmia has chalked out an ambitious strategy to triple the Dalmia group’s cement manufacturing capacity over the next decade.
Market pie: Dalmia Cement (Bharat) Ltd managing director Puneet Dalmia says if the company can capture a small fraction of the gross domestic growth, it will be enough on its plate to concentrate on. Ashesh Shah / Mint
Dalmia Cement (Bharat) Ltd, or DCBL, the second largest cement maker in southern India after India Cements Ltd, has firmed up plans to expand its cement capacity to 35 million tonnes (mt) by 2020 from the current 13.5 mt, to grab a 10% share of an estimated 500 mt market in 11 years, DCBL managing director Dalmia said in an interview with Mint last week.
As part of the new strategy, DCBL, which currently earns most of its revenues from Andhra Pradesh, Tamil Nadu and Kerala, will expand to eastern India, dominated by Lafarge India Pvt. Ltd, and northern India where Ultratech Cement Ltd, ACC Ltd and Ambuja Cements Ltd are the market leaders.
“We have floated a special purpose vehicle—Dalmia Cement Ventures Ltd—a fully owned subsidiary of DCBL, that will build 10 mt (production capacity) in Karnataka, Himachal Pradesh and Meghalaya,” said Dalmia. The SPV has acquired 10,000 acres of land in the three states and has received environmental clearance for leased limestone mines, the critical raw material to make cement. An additional 10mt of capacity will be built in Madhya Pradesh and Rajasthan for which the company has begun land acquisition. According to the company’s estimates, the total investment to build 20 mt capacity is Rs6,400 crore. DCBL needs Rs800 crore to put up a 2.5 mt unit that excludes land and power cost.
“We have invested Rs250 crore and have a confirmed credit line of Rs3,000 crore to build 10 mt and we have a range of options, including a stake sale in Dalmia Cement Ventures Ltd to private equity investors, an initial public offer or even a follow-on offer by the parent company,” said Dalmia, who represents the third generation of the Dalmia group.
Dalmia, 35, rejoined the family business in 2004 after selling JobsAhead.com, the e-recruitment portal he set up with a college mate, to Monster.com for $8 million (Rs38.7 crore). The Dalmias were the third largest industrial group in the 1940s after the Tata group and the undivided Birlas, and had 21 businesses, including banks, aviation, newspapers and railway companies. The group split in 1948 and 1970.
DCBL’s net profit rose from Rs31 crore in 2004-2005 to Rs159 crore in 2008-09. Total revenue also grew to Rs1,779 crore from Rs464 crore during the same period.
The Dalmia group’s expansion plans could help it break into the top five producers with countrywide presence. DCBL’s current share of domestic capacity is 6.2%. India is currently the world’s second largest cement producer at 217 mt annually, next only to China, which makes 1,400 mt a year.
“With unutilized capacities, our market share will be 10%,” he said. The target capacity is only 7% of the projected 500 mt capacity in 2020 and 3 percentage points short of Dalmia’s stated objective of taking 10% of the market.
The challenge for cement companies is to minimize the cost to serve the customer rather than cost of production, said Kaustav Mukherjee, vice-president and partner of global consulting firm AT Kearney. According to his firm’s estimates, India will expand to 550 mt by 2020 and per capita use will rise to 350kg from 150kg annually, while Chinese consumption will rise to 1,500-2,000kg.
If Dalmia is successful in his aim, he will effectively have almost tripled in 11 years the 13.5 mt capacity it has taken DHCL 74 years to build since its birth in 1935. In fact, that capacity is the result of a doubling of output in the last five years, largely through acquisitions, after Dalmia and his cousin Gautam Dalmia took the reins of the company, which went public in 1956.
Unlike India’s Grasim Industries Ltd or multinational Holcim Ltd that build cement capacities through acquisitions, DCBL has chosen to build cement factories. That takes time. “We just did not have the size of the balance sheet or the willingness of some multinational companies to pay…. We purchased Orissa Cement Ltd as one member of our family wanted to exit cement business,” he said. “But we are now open to purchase cement companies that will add to our pricing power and saves logistics cost,” he added.
“We are not leaders in any of the sectors we are now in, be it cement, sugar, refractory and power. We would like to build scale in India, and if we can capture a small fraction of the gross domestic growth, it will be enough on our plate to concentrate (on),” Dalmia said.
Manoj Mohta, head of research at rating agency Crisil Ltd, a Standard and Poor’s company, said cement consumption, which has grown by an average of 10% for three years to 2008-09, will slow to 7.5-8% for three years. Mohta, in a 9 July report on the cement industry outlook for the next three years, said fresh capacity will force cement companies to cut down capacity utilization to 80-85% for three years from 90-95% now.