Davos WEF 2018: Why Puneet Dalmia Thinks New Investments In Cement Don’t Make Sense Right Now

Puneet Dalmia thinks current returns don’t merit new investments.

Workers unload sacks of cement. (Photographer: Kuni Takahashi/Bloomberg)
Workers unload sacks of cement. (Photographer: Kuni Takahashi/Bloomberg)

Dalmia Bharat Group’s Puneet Dalmia said new investments in the cement sector make little sense at current prices.

The industry is seeing a volume growth of 6 percent, and an average operating profit of Rs 1,000 per tonne, Dalmia, the company’s managing director, told BloombergQuint’s Menaka Doshi on the sidelines of the World Economic Forum at Davos, Switzerland. “At these prices, new investments are unviable,” he said. The industry, he said, needs an operating profit of around Rs 1,500-1,700 a tonne if it wants to achieve a double-digit growth.

Here are the edited excerpts of the conversation.

What do you expect in 2018 from the Indian economy? Your business is closely linked with what the economy does.

I think a lot of things are going to happen. Firstly, the NCLT process has started, and all the banks’ balance sheets are going to get cleaned up. By the end of this year, a lot of assets are going to get new owners. They will also become performing assets on the balance sheets of banks. The credit cycle should hopefully start post-September, at least on the corporate side. Secondly, there have been significant announcements in infrastructure development. The government is very clear that to create sustainable economic growth over 20-30 years, India needs more infrastructure. There has been enormous progress in accelerating infrastructure development like roads, electrification and creating digital infrastructure like Aadhaar. So, there has been a lot of momentum in physical and digital infrastructure. That will create a great foundation for the economy to deliver good growth in the next 10-20 years.

What do you expect volume growth to be like in 2018?

Our volume growth in cement has been in double digits. We have been in mid-teens. Overall for the industry, volume growth has been 6 percent. Infrastructure and affordable housing is a good driver, but real estate is a big dampener because of demonetisation, RERA (Real Estate Regulation Act) and GST (Goods and Services Tax). We are seeing a massive shrinkage in organised real estate. If the industry can post a volume growth of 6 to 7 percent at an all-India level, that will be very healthy.

That means you will be able to maintain the volume growth you saw in the first two quarters of this fiscal?

Maybe a few (percentage) points higher—7-8 percent.

What about pricing?

There is a cost push right now. Oil prices are going up—that mean’s coal, pet coke and diesel prices are going up. Some of them can be passed on depending on the demand-supply scenario in various markets since it’s not a uniform market. It will be a mixed bag.

Where do you expect stronger pricing?

We are seeing strong pricing in north right now and healthy pricing in deep south although it has been weak in the last few months. Prices have been weak in Bihar and some parts of Maharashtra as well. And sand prices have gone up nearly five times due to the crackdown on the sand mafia. In some of these things, you have to pay a short-term price for cleaning up the system and I believe that in the longer term, it’s much better. We don’t invest with a one-year horizon but with a long-term view. A few short-term blips are not something that bother us.

Do you expect cost pressures to have a substantial impact on your bottom line in the last two quarters of the current fiscal and the first two quarters of the next fiscal?

If you look at the last quarterly result of UltraTech, there has been some margin compression owing to higher fuel costs. Many results are due to be announced in the next couple of weeks, and then we will get a broader industry trend on what is happening. In the short term, there are cost pressures. Also, UltraTech consolidated one of the largest acquisitions in the history of the industry which was running at a low capacity utilisation. I think as they ramp that up, there will be a little bit of supply pressure in some markets. A couple of quarters might be volatile in terms of margin. In the long term, as demand picks up and as more consolidation happens (due to stressed asset resolution) in the NCLT, the industry should have a reasonably good margin.

At what band will your margins exist over the next few quarters, given the fact that demand is not picking up the way you see, at least in the short-to-medium term due to which there is weak pricing?

If you look at the margin of the top players, the Ebitda per tonne is around Rs 1,000. Slightly more efficient ones are around Rs 1,100-1,200 and the less efficient are anywhere between Rs 600 and Rs 700 per tonne. In the recent quarter, UltraTech was at Rs 800-850—about 15 percent below the normal. If you look at the fair-return requirements and want to make 12-13 percent—most people would like mid-teens—the Ebitda per tone has to go up to Rs 1,500-1,700. And a Goldman Sachs report said that assuming a 75 percent capacity utilisation, for a mid-teens return Ebitda has to be Rs 2000 per tonne.

So, at these prices, new investments are unviable. I expect margins to slowly rise over the long term as the industry consolidates and demand picks up, provided there are no irrational investments in the sector.

What do you expect your margin to be in the next two quarters?

It is difficult to predict. Also, we do not give forward guidance. We are doing Rs 1,100 to Rs 1,200 per tonne already.

Will it be stressful to maintain that?

It will be difficult to maintain margins in the short-term because of the cost pressures. We have a strong strategy for developing brands and also shifting to more specialised products. Hopefully, we will be able to offset part of these cost pressures through branding and a more business-to-customer model.

But you are still not going to increase the price if it comes at the cost of market share. I assume that margins will be the first to give in the next few quarters till you see a recovery in demand.


The story goes that you are the second-highest bidder for Binani and not the first as JSW Steel is the top bidder. Is that true? Are you willing to lose the asset that gives you great strategic geographical presence? Is there any other asset you have in sight? How much have you allocated to inorganic growth this year?

We were the first to participate in the NCLT resolution process with Murali Industries— a reasonably sized asset that was also the first non-promoter NCLT resolution. We are looking at distressed assets in a very serious way. In the last five years, we have developed a strong capability to acquire such assets and turn them around. Some of these assets require capital infusion as well as good management. There are good assets located in good markets. If you just change their capital structure and provide them with working capital and good governance, I think there are good returns that will be made here.

So clearly that’s an area with strategic focus. While you have to be strategic and willing to pay up, I think one has to maintain capital allocation discipline. We don’t won’t be very aggressive regarding how we bid. We read in the papers that JSW is the highest bidder and there has been no formal communication. All the six bidders have been called for the next round of discussion, and all of them have an opportunity to better their price.

Are you going to fight hard for this one because it gives you strategic geographical presence?

This is a strategic acquisition for us, but we are also very returns-focused. So, we will remain balanced regarding how we bid. We have done a fair amount of work on this, so we know what are the opportunities and challenges in this asset.

It is a market where we have low-cost competitors with very underleveraged balance sheets. It’s not going to be easy to revive the asset and aggressively ramp up. It will give you returns in the longer term.

North is an attractive market. We need to balance the initial pain of ramping up the asset and getting the margin back versus the strategic advantage of entering a good market. We don’t want to take our debt to EBITDA ratio above a certain level. We may end March 2018 at 2:1 debt-to-Ebitda and don’t want to go beyond 3 to 3.5.

What will you do to reduce debt?

We are in a pretty good position right now. We have the firepower in the balance sheet to expand. If the debt-to-Ebitda is within 3-3.5, it’s a healthy number. If we are too underleveraged, that’s not a suitable capital structure, and if you are too aggressive, then you create a high risk for your investors.

If you lose Binani, what is the plan for the north? Because there is no other asset in the NCLT process of that strategic size and nature?

We are taking one step at a time. We already have some mines in the north. It all depends on how this plays out. Competitive processes are always uncertain. We have greenfield opportunities in the north, so it’s not like we cannot enter this market.

But you just explained it’s not a right time to put in new capacity. Neither the demand situation is favourable nor is the fragmented nature of the industry. I assume you might not want to go the greenfield route. Are there any other assets besides Binani and NCLT?

The demand-supply varies from market to market. If you look at capacity utilisation in the north, it’s the best right now. It’s an area where people will install new capacity. Whenever we make greenfield investments, it is not overnight. It takes three-five years, and by then, the demand-supply situation should improve.

If you don’t get Binani, you are hoping to go the greenfield route?

We have a portfolio of expansion opportunities in the group across regions. I think we will have to prioritise them depending on how each market or region is behaving. At this point of time, it is difficult to say what will be our priority because we are still evaluating all the projects and rating them regarding attractiveness. There are some brownfield, greenfield and acquisition opportunities.

It’s important for us to balance short-term returns with long-term positions. We are lucky to have choices across the board, and we will make those decisions wisely and, hopefully, create value over the medium term.

Is there anything else except Binani in the NCLT process right now?

Binani is the largest asset right now.