Dalmia Cement takes inorganic path to growth; Binani acquisition is crucial

Company sees it as a better time to buy rather than build its own cement assets; Binani deal, in which UltraTech is a hurdle, will boost its capacity to 40 mn tonnes

Having set its first cement plant in 1939, Dalmia Bharat Group is one of the oldest cement manufacturers in India, with more than 70 years of presence in the market. Most of its capacity growth, however, happened in the last one decade, which could see a further leap with its ongoing acquisitions.

Between 2004 and 2017, the company grew to a 25-million-tonne capacity from a modest 1.2-million-tonne-per-annum cement making company. With three acquisitions underway, this capacity is bound to rise higher. With its planned acquisitions of Murli Industries and Kalyanpur Cements, the capacity increase to 29.1 million tonnes. Though stuck after UltraTech's counter offer, if the Binani Cements deal goes in Dalmia’s favour, this capacity catapults to 40 million tonnes per annum in India.  

“In the current phase of expansion we are allocating capital to strengthening our position in existing markets like Bihar (Kalyanpur deal) and entering new markets for growth and diversification (Murli and Binani),” said Puneet Dalmia, managing director for Dalmia Bharat Group in an interview with Business Standard. Puneet is the third generation managing the group and has been with the group for the past eleven years overseeing most of the cement expansion. He added the focus for the cement business to build scale in India. 

The strategy to strengthen existing markets, while also explore newer ones to de-risk current exposure is a well-tested one for the group. In the past, the group adopted a similar strategy to de-risk its huge exposure to the South India market, by acquiring capacity in East India markets. The company is likely to continue with the same strategy for the next five to seven years. “Over the next 5-7 years, we will continue to balance the asset portfolio in existing and new markets to achieve consolidation, growth and diversification, while maintaining a strong balance sheet and managing risk carefully,” Dalmia added. 

The last one decade also saw the company wisely match its expansion strategy with the right strategic investments. Dalmia agrees in addition to capital requirements, its association with global investment firm Kohlberg Kravis Roberts & Co. LP (KKR) also helped in its inorganic growth plans. “KKR not only provided growth capital but it helped us build great systems for sourcing, evaluating and closing acquisitions. We went through a learning curve as we learnt the art of integrating acquisitions. It's a totally different skill compared to organic growth,” he said. In 2010, KKR invested Rs 7.5 billion in Dalmia Cement, which it later exited in 2016 for a preferential issue of 7.5 million shares in parent company Dalmia Bharat along with a cash consideration of Rs 6 billion. 

However, there could be a slight hitch in Dalmia’s plan of expansion. One, the company still awaits finality on the Binani deal, with the country’s largest cement producer Ultratech Cement contesting against the decision to allow Dalmia Cement takeover Binani’s assets. In addition, post Binani there ain’t many assets left in the market which are up for sale. However, Dalmia remains confident it is a good time for the company to be in the buyer’s chair. “We tend to buy when there is excess supply, low growth and low entrepreneurial confidence. The tendency to overpay for acquisitions during such times is less likely.

Right now, there is excess leverage on some assets, demand growth is low in most regions, and new regulations like IBC are forcing time bound M&A. For companies with good governance, lots of capital is available and for companies with poor governance, the supply of both debt and equity capital is totally shutdown. It's an amazing time for companies like us. From a timing and asset pricing perspective, we feel that this is a better time to buy rather than build cement assets,” he added. 

Dalmia’s confidence is also in contradiction to the current demand –supply mismatch in the cement industry. Dalmia admits his own cement assets  are current at around 68% utilization levels.  However, like many other cement manufacturers he remains bluish on India’s infrastructure story. “Our present capacity utilisation level is around 68% and we have enough headroom for growth without any more capex in our existing footprint. The capacity utilisation is below the industry average of 73% since some of the assets in our portfolio are new and still ramping up. We are very bullish on Indian infrastructure and housing and are convinced that the demand growth will outpace supply growth over the next 5 years. 

With its current capacity, Dalmia Cement is the fourth largest cement producer. If the current legal battle over Binani’s assets went in Dalmia’s favour, in addition to its other two acquisitions, Dalmia Cements will hit more than 40 million tonne mark in capacity and catapult it to the third largest cement manufacturer position.  Dalmia did not put a future capacity expansion target, but added domestic markets would remain its focus. However, cement industry in India continues to remain competitive in terms of market leadership, Shree Cements for instance plans to touch 40 MTPA capacity by 2020. This should be reason enough to keep the Dalmia clan on their toes and on the look-out for more assets.