Concrete Gains

In 2005, Dalmia Bharat was no more than a bit player in the cement industry with an installed capacity of 1.2 million tonnes per annum (mtpa). This was when India had a total capacity of 150 mtpa. Today, Dalmia has reached 25 mtpa through a series of inorganic and organic initiatives against a national capacity of 440 mtpa, making it the fourth largest player after UltraTech, LafargeHolcim and Shree Cement, with an enviable position in the south, east and north-east markets.

Over the last four months, the company has been in the thick of M&A. In December, it acquired the three million tonne plant of troubled Murli Industries, a Nagpur-based cement company. The following month, it bought over Kalyanpur Cement, a one million tonne operation in Bihar. Together, these two deals will involve a total outgo of Rs.750 crore, with another Rs.450 crore proposed to be invested as capex for Murli’s cement plant. 

Of Dalmia’s total capacity, 47%, 40%, 13% is in the east, South and north-east region respectively. According to Mahendra Singhi, Group CEO (Cement), Dalmia Bharat, the strategy is to be a pan-India player. “There is a lot of growth potential in both the north and west regions,” he says. These two regions have an average capacity utilisation in excess of 75%, while it is 70% for the east; the south at 50% is the lowest.    

The buyout of Murli, located in Maharashtra’s Chandrapur district, opens up neighbouring Madhya Pradesh for Dalmia. That said, the real target is Binani Cement, located in Sirohi in southern Rajasthan. It has an integrated cement plant in addition to a grinding unit in Neem ka Thana, located 150 km from Gurgaon. Both these facilities will give access to key markets like Gujarat, Madhya Pradesh, Haryana, western Uttar Pradesh and, of course, Rajasthan. These two plants together have a capacity of 6.25 mtpa. Binani has another five million tonnes in Dubai and China. Analysts say that if Dalmia Bharat bags Binani Cement, it will put the international assets on the block. Recent media reports suggest that the AV Birla Group owned UltraTech has increased its bid for Binani by Rs.700 crore to Rs.7,200 crore. This is after Dalmia is said to have won the bid for Rs. 6,300 crore, as a part of a joint offer made with India Resurgence Fund, backed by Bain Capital and Piramal Enterprises. The acquisition by Dalmia with its consortium has been already been cleared by the Competition Commission of India (CCI). Binani has been in trouble ever since it defaulted on a debt of Rs.3,976 crore during the last fiscal and subsequently filed an application under the insolvency and bankruptcy code.   

While Singhi declines to comment specifically on this deal, the deal with Murli gives it a mere foothold in the western region. The thumb rule is to have a plant no more than 350-400 km near the market to make the business economically viable. That limits the gains from the Murli plant. That explains why Dalmia is willing to pay a rather steep valuation of $150 per tonne for Binani’s assets. In comparison Nirma paid $127 per tonne for Lafarge India’s assets and UltraTech’s deal with Jaypee was done at $112 per tonne. Prateek Kumar, analyst, Antique Stock Broking, says there is no doubt that a new plant can be set up for $120-130 per tonne or maybe even lower. “The premium for the Binani asset is for the brand, surplus limestone reserves, ready-made infrastructure and the time saved in setting up a plant or a distribution network,” he adds.

The deal, while giving it a broader geography, will burden Dalmia with more debt as well. Assuming it will need to pay a little over Rs.3,000 crore for Binani, with an equal amount coming from the Bain-Piramal combine, its net debt to Ebitda will be more than 3x. “A potential acquisition of Binani will increase gearing for Dalmia making it more vulnerable to an adverse cement cycle than most of its large peers,” says Kumar. The company’s revenue almost doubled to Rs.8,348 crore in FY17 from Rs.3,998 crore in FY15 post its OCL acquisition and it went from posting a loss of 63 crore to a profit of Rs.431 crore during the same period on the back of improving efficiency, reduction of costs and turnaround of acquired assets. 

In one stroke, a successful bid for Binani will place it at par with Shree Cements’ 34.9 mtpa. Singhi will happily settle for that.