A worker unloads sacks of cement from a freight train in Mumbai, India (Photographer: Kuni Takahashi/Bloomberg)  

Davos 2019: Puneet Dalmia Expects Cement Makers To Regain Pricing Power 

Pricing power is expected to return to cement makers due to strong domestic demand and consolidation in the sector, according to Dalmia Bharat Group Managing Director Puneet Dalmia.

“Over the last 15 years, prices have grown at 5 percent CAGR (compounded annual growth rate) annually. Over five to six years, however, prices grew at only 2-3 percent. So, there’s a scope to catch up,” Dalmia told BloombergQuint on the sidelines of the World Economic Forum in Davos. “Even though we see some headwinds for organised real estate demand, it will be more than compensated by affordable housing and infrastructure spending.”

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According to Dalmia, the construction of around 15 metros and various new airports will aid the domestic demand. He, however, remained cautious about the short-term prospects of the cement industry. “We are not able to pass on the rising input costs to customers.”

At a national level, we are running at 65 percent capacity utilisation on an average, Dalmia said, adding that there is still a bit of market share fight in some markets.

Entry Barriers Set High

Around 2007, there were a lot of new entrants due to "easy credit" available in the form of debt and equity, Dalmia said. This, he said, resulted in intense competition and slow growth in prices.

There were almost 17-18 new entrants. And, the industry deconsolidated at that point of time. However, there are structural changes now which will limit the new entrants and entry barriers are going up driven by regulation.

Dalmia spoke about the changes to the business environment for the sector be it in terms of regulatory landscape for natural resources, insolvency law and revised land acquisition bill which could limit volatility for the space and encourage consolidation, a key factor for revival of prices.

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“Limestone mines, for example, if you had a good relationship in a state and you would get a limestone mine allotted and that allowed you to enter the business. But now it's auctioned," he said. He said the law changed the entrepreneurial psyche that even big companies can afford to lose their businesses.

Also, with companies mandated to shell out around twice the land rate in rural areas and four-fold in urban areas as per the new land acquisition law, this takes a long time for a new plant to be set up, giving an edge to the incumbents, said Dalmia.

Acquisition Opportunities

Having acquired two distressed plants, and with only a few large acquisition opportunities left, Puneet Dalmia expects more opportunities via organic route over the next few years. But the company, he said, will look into each and every single opportunity in the sector without comprising its financial discipline.

Dalmia said the company is adding 12 million tonne of capacity—8 MT through organic and 4 MT through inorganic route—as it expects to complete its expansion to eastern India by the end of calendar year 2019.

The company is also hopeful of completing acquisition of insolvent Murli Industries Ltd. by the end of financial year 2019 or the first half of the financial year 2020. Dalmia Bharat’s total capacity is expected to rise by 50 percent to 37 MT against 26 MT by FY20, Puneet Dalmia said.

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Restructuring Advantage

Puneet Dalmia said the group has simplified its structure by consolidating all the cement and power assets with Dalmia Cement (Bharat) Ltd. to streamline decision-making and enhance cash flow of the company. “Calcom Cement and Kalyanpur Cements will remain subsidiaries.”

The listing of Dalmia Bharat combined entity is expected to take place between Jan. 28-31, he said, adding that the consolidated structure will add 100 basis points to Ebidta margin.

Other Key Highlights:

  • Company’s debt-to-Ebitda is expected to improve to 2.5 percent in FY19 from 3.7 percent in FY18.
  • Real estate sector to continue to struggle till FY20.
  • Expects 8-10 percent demand growth for FY20.
  • Top four cement players control 60-65 percent of capacities.
  • Still 35-40 companies fighting for market share in India.
  • In other economies, there are under 10 players.

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Watch the full conversation here:

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Here’s the edited transcript:

Could you speak about the restructuring you have done and when is the listing expected to happen?

We started the restructuring exercise a year ago and now we’re pretty much at the end of it. It was a slightly complex exercise because there were many subsidiaries and two listed companies merging and fresh listing going to happen. It took longer than we expected. And I think the listing should happen next week. So, by the time I’m in India after Davos, we’ll see the listing happen.

Have you got a date or waiting for some last minute paperwork to be completed?

I think we are waiting for a final approval from NSE and SEBI. But my sense is somewhere before the end of Jan. 28-31, it will be listed.

What is the post-listing scenario from investor’s point of view?

There is just one listed entity. That is a big transformation. And, there is one wholly-owned subsidiary and one Calcom. So, a total of two subsidiaries. All this happened because we acquired companies over the last five-six years when we were expanding. The acquisitions were made through shares. It was a structure that just evolved out of out strategy. And, post scaling we had to fold it all together as promised to the market. The good news is there will be one listed entity and there will be a lot of synergies. There were a lot of extra costs we incurred because of managing too many entities. There will be efficiency in terms of costs. I think this will lead to at least 100 basis points improvement in Ebitda margin a year which is pretty substantial because at a scale of Rs 10,000 crore it will be at least Rs 100 crore a year.

Regarding your acquisition strategy for Binani Cement. Are you going to litigate it further? And, what is your inorganic strategy for 2019?

On the Binani matter, Ultratech has won the deal. So we have moved on and there is no more uncertainty left on that account. Our focus has now shifted to managing our current expansions well. We have acquired Kalyanpur Cement and case is going on for Murali for which case should be settled by the end of this financial year or early FY20. That’s about 4 metric tonne and we have a large expanison going in east India which will come on stream before this calendar year. Currently, we’re about 26 MT and we will go to 37-38 MT by the end of this fiscal. So that’s about 50 percent jump in capacity. Overall balance sheet should also be strong. Last year, it was 3.7 debt-equity ratio and by Mar. 2019, it is going to be 2.5. So, balance sheet is improving and cash flows are kicking in.

The cycle is a little soft. Energy costs and slack prices and we have not been able to pass on the input costs to customers because demand was a little slow. So overall, there is margin compression in the short-term leading to consolidation and improving the industry structure. The mid-term outlook is strong and I’m bullish.

What is your outlook for FY20 in terms of cement demand, prices and ability to pass on costs?

The demand growth has been very strong in FY19 at about 12 percent except for the last few months. Huge foundation has been laid in place for a strong domestic growth. India is growing at 7.5 percent and World Bank is very positive on outlook of India. Even though we see some headwinds in organised real estate like dampening of demand, it will be more than compensated by affordable housing and infrastructure build-out. There are more than 15 cities where metros are being built which consumes a lot of cement. The real estate sector will suffer from negative outlook at least till FY20. I don’t see the situation improving because organised and NBFC finance is not available to them easily.

On pricing, there is not much supply coming in and consolidation is happening. So eventually, there will be pricing power which returns to the industry. But in the short-term I’m cautious about prices. we are not able to pass on cost incurred to the customers . Even today, at a national level, we are running at 65 percent capacity utilisation on an average. There is still a little bit of market share fight in some markets. Long-term prices should grow at a healthy pace. Over the last 15 years, prices have grown at 5 percent compounded annual growth rate which is low than inflation. But over the last five-six years, prices have grown at only 2-3 percent CAGR. So, I think there is scope to catch up once demand growth is continuing its momentum and supply growth is reducing.

Why are prices stagnant or little-changed in the last five years despite consolidation happening?

If you look at what happened in 2007, a lot of easy credit was available to companies whether it was debt or equity financing. And lot of new entrants came into the cement sector. I think that capacity came on stream in 2010-11. There was a lot of competition due to the new entrants. There were almost 17-18 new entrants. And, the industry de-consolidated at that point of time. And, now because of the insolvency law, consolidation is happening gain. I also feel that India is the most competitive cement market in the world in terms of industry structure. In other economies, even in de-fragmented ones, there are under 10 players. In India, there are still 35-40 companies fighting for market share. Real estate construction and pricing power compared to western markets is improving but it’ll takes us a while to reach that level like it has happened in a telecom, after a lot of pain.

Are you seeing the formation of top 5 in the Indian cement space?

Yes, but they control only about 60-65 percent of the capacity and there is still a third that is defragmented. However, there are structural changes which will limit the new entrants and entry barriers are going up and most of this is driven by regulation.

For example, limestone mines were alloted. So if you had a good relationship in a state and you would get a limestone mine in that state and that allowed you to enter the business. But now it is auctioned. The law changed in 2015 and we are seeing it play out. In the last auction, only one has been won by a new entrant. It is a big change in landscape where all natural resources will be auctioned. And the insolvency code has also changed the entrepreneurial psyche that big businesses can lose their businesses and nobody can help them. It will also not create over investment in the sector. And, it takes much longer in India to build a plant because change in land acquisition law. You have to pay two times in rural areas and four times for urban areas. These three changes will limit the volatility and accelerate the consolidation.

So in 2025, who will be the top 5 players?

Four positions have already been taken. If I look at the current situation I don’t see them changing substantially. Because Ultratech’s capacity is 100-plus MT, Lafarge ACC are 70-plus MT, Shree Cement and Dalmia are in their 30-40s. So don’t see the league tables change substantially but it is difficult to predict.