Dalmia Cement

Aggressive plans for expanding cement capacities by entering new markets, newly commissioned capacity which is set to contribute to revenues this year and good prospects for the sugar business argue for investing in the stock of Dalmia Cement (Bharat), which trades at 10 times its trailing one-year earnings. About 74 per cent of the company’s revenues are derived from cement, 20 per cent from sugar and the rest from refractories (material used for lining inner surface of furnaces). The company’s cement business is strongly placed in its home market of South India, with a sizeable addition (five million tonnes per annum) to capacity in the last six months. The current installed capacity is nine mtpa, which DCBL plans to enhance by another 18-20 million tonnes over the next 10 years
Demand in the South

The company’s current capacities are all centred in the South — a 4 mtpa unit in Dalmiapuram and a 2.5 mtpa unit in Ariyalur, both in Tamil Nadu; and a 2.5 mtpa unit in Kadapa, Andhra Pradesh.

Of this, both Kadapa and Ariyalur are recently commissioned units which will begin contributing to revenues and earnings only from this fiscal.

The Southern region, which reported sluggish growth in cement demand in May and June, caught up in July with a 10 per cent growth in despatches against the all-India average of 11 per cent. One near-term worry for players in the region is the recent capacity additions — of the total 20 million tonnes of cement capacity added during FY-09, 16 million tonnes were in the South. This has brought down average utilisation rates for cement units in the region to 82 per cent now from the 92 per cent of last year.

In the long term, however, the South looks a promising region with State governments according priority to infrastructure and urban development projects. The metro rail projects, higher spending on road development for rural connectivity and housing for the poor may, for instance, ensure good demand in the home State of Tamil Nadu.
Diversification to help

Dalmia Cement also has ambitious plans to expand its geographic presence outside of the South. It aims at becoming an all-India player with a total capacity of 35 mtpa at the end of ten years. Including the 5.3 mtpa of OCL India, in which the company has a 21.7 per cent stake, the company controls capacity of 14.3 mtpa currrently.

With two units of capacity totalling 6 mtpa at Belgaum and Gulbarga, the company is planning an entry into Karnataka.

Also on the cards are units in Himachal Pradesh (4 mtpa), Meghalaya (2 mtpa), Rajasthan (4 mtpa) and Madhya Pradesh (2 mtpa). In Rajasthan and MP, the company has procured land and preliminary activities are on. Limestone belts have been identified in all these regions.

While this expansion bid will no doubt add scale and diversify revenues, the Northern and Western markets are already intensely competitive with several established brands.

The mode of financing for this massive Rs 7,200-crore expansion is also as yet uncertain, with the company evaluating the options of private-equity funding and a follow-on public offer, both of which will entail equity dilution.

As the company’s current debt-equity ratio stands at 1.8:1, further room to increase borrowings is limited. Net debt outstanding, as of March ’09, was Rs 2,338 crore (higher over the previous year by 48 per cent).

Apart from cement, Dalmia Cement controls sizeable crushing capacities for sugarcane at 22,500 tonnes per day. The company has seen a steady increase in its sugar output and realisations over the past five years, with the company marketing 1,62,000 tonnes of sugar in 2008-09 (75,000 in 2004-05).

Prospects for the sugar business (21 per cent of revenues in 2008-09) are bright over the medium term, given the big domestic shortfall in sugarcane output and tight demand-supply equation.
Prospects

With sugar prices doubling from their lows, realisations for producers can be expected to expand sharply this year. Already, as a result of buoyant sugar prices in 2008-09, DCBL’s EBIDTA margin (of the sugar division) improved from 9 per cent in FY-08 to 17 per cent in FY-09. With the sugar operations just turning profitable at the net level in 2008-09, one can expect a sharp improvement in sugar contributions to the profitability this fiscal.

While there may be price-driven improvement in profits for sugar, the cement operations may see margin expansion as result of falling coal prices. Substitutes have been used for high-cost inputs used in the raw mill and fuels deployed in the kiln.

DCBL’s operating margins have shrunk significantly (from 41 per cent in FY-07 to 28 per cent in FY-09) in the last two-year period mainly due to the rise in coal and other input costs (fly ash and gypsum).

The company will, however, see some relief in costs as inventory is replenished this quarter. New captive power plants (of 300 MW) which the company intends to put up at Kadapa and Ariyalur will also drive savings in cost.