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Dalmia Cement: Ambitious expansion plans - Views on News from Equitymaster

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Dalmia Cement: Ambitious expansion plans

Jul 21, 2009

Dalmia Cement recently held an analyst meet to discuss the company’s performance during FY09. The management also discussed the future plans of the company. Here are the key takeaways from the same. A brief about the company: Dalmia Cement Bharat Ltd (DCBL) was founded in 1935 and the cement division was established in 1939. The company’s current capacity is 6.5 m tonnes and has over the years evolved as a super specialty cement manufacturer. It diversified into sugar in 1994. DCBL is headquartered in New Delhi with cement plants in South India and integrated sugar plants in the state of Uttar Pradesh. The company has a capacity of 22,500 tpd (tonnes per day) for its three sugar plants. The company holds nearly 22% stake in OCL India, which has a cement capacity of 4 MT set up in Orissa. This investment has not only provided Dalmia Cement a presence in the eastern markets, but has diversified its business interest into refractory business. The company at present enjoys a 12% market share in the southern regions (Kerala and Tamil Nadu), while in Orissa it enjoys nearly 30%. In West Bengal is has a share of 8%.

FY09 performance: On a standalone basis, the company has reported 18% YoY growth in the topline for the year ended FY09. The growth was due to higher volumes and realisations witnessed by both segments – cement and sugar, which contribute nearly 95% to the total revenues. Despite topline reporting a sizeable growth, growth at the operating level (6.6% YoY) has been subdued as increased in cost of operations exerted pressure on profitability. The higher coal prices have arrested the growth in margin expansion. The same is an industry wide issue. The company maintains nearly 40 to 45 days of inventory. The coal prices have cooled off, nearly halved in dollar terms, however, the benefit of it will start flowing in 2QFY10 onwards as the company is liquidating the high cost inventory. While the operating profit reported subdued growth, profit before tax was lower by 50% YoY. The same is the result of lower other income and higher interest cost. The company has leveraged its balance sheet to expand and grow the business that resulted in higher interest cost. The other income was lower owing to treasury loss. On a consolidated basis, topline reported 18% YoY growth, while bottomline witnessed a steep decline of nearly 67% YoY. The reasons for the poor show of profitability are no different as compared to standalone performance.

Over the years: Cement sector has successfully moved in tandem with the economic growth. 70% of the company’s revenues are accounted by cement business. The recent upturn witnessed by the cement industry has helped the company report impressive numbers. The company’s sales have grown at a compounded annual growth of nearly 40% during FY05 to FY09, while operating profits reported a robust 64% growth during the same period. This phenomenal growth was backed by growth in volumes, especially in the case of cement business. The higher profitability has also been the result of an increased blending ratio. Historically, the southern region had witnessed an excess supply situation. However, with capacity addition taking place at a slower rate as compared to growth in demand, recently the demand supply parity has also been restored to some extent in the Southern region. Thus, apart from volumes, improved realisations have supported the growth.

Over the years…
Particulars Unit FY05 FY06 FY07 FY08 FY09 Growth rate
Cement ('000 tonnes) 1,403 1,577 2,713 3,265 3,383 24.6%
Sugar ('000 tonnes) 75 99 93 141 162 21.2%
Look at financials
Sales Rs m 4,500 5,850 9,860 14,810 17,530 40.5%
Growth %   30.0% 68.5% 50.2% 18.4%  
Operating profits Rs m 730 990 2,700 4,960 5,260 63.8%
Margin % 16.2% 16.9% 27.4% 33.5% 30.0%  
Profit after tax Rs m 310 850 2,290 3,470 1,590 50.5%
Margin % 6.9% 14.5% 23.2% 23.4% 9.1%  
Source: Company reports

Future plans: In FY09, the Dalmia Cement incurred a capex of Rs 13 bn to ramp up its operations. The company’s capacity is estimated to scale up to 9 MTPA by FY10. The company has outlined nearly Rs 4 bn capex for FY10 to set up a 2.5 MTPA greenfield plant in Tamil Nadu, which is under process and expected to commission in 1HFY10. The Dalmia group cement capacity (including OCL) would reach 13 MTPA by the end of FY10. The move is part of the company’s high aspirations to be one amongst the top 5 cement players in India with a national footprint. The expansion plans also includes setting up of captive power plants of 27 MW to improve its operational and cost efficiency. The company has commissioned 18 MW of thermal captive power plant taking its total installed capacity to 45 MW.

While these moves will enable the company to sustain market share and keep a check on rising cost of operation, upcoming capacities amidst the economic slowdown will pressurize realisations and hence profitability.

To conclude:
At the current price of Rs 149, the stock is trading at 7.6 times its trailing twelve month earnings. The company has lined up capacity expansion plans to increase volumes and maintain market share. While this is a positive move from a long-term standpoint, the rising costs coupled with expected softening of realizations will pressurize margins in the medium term.

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