Slowdown, earnings pressure are temporary: Dalmia Cement (Bharat) MD & CEO

The financial year 2021-22 ended on a tough note for Dalmia Cement (Bharat) with the country’s fourth biggest cement maker reporting 5.1 per cent year-on-year (YoY) decline in net profit in Q4 due to margin contraction and volume decline. However, company’s Managing Director and Chief Executive Officer Mahendra Singhi tells Krishna Kant that the industry will be back on the growth path by the second half of FY23 and his company is on track to execute its expansion plans. Edited excerpts:

Dalmia Cement (Bharat) has actively used acquisitions to outpace industry growth. Given this, are you in the race to acquire Ambuja Cement and ACC?

I won’t comment on market speculations. The long queue to acquire Holcim India assets by some of India’s biggest companies despite the hefty price tag suggests that the future of the country’s cement industry is bright, which is a positive for us and the entire industry.

One of the possible reasons for Holcim’s decision to exit the Indian market is to cut its carbon dioxide (CO2) emissions by reducing cement's share of overall revenues. Doesn’t this raise a question mark on the cement industry's future in a net-zero world?

No one is sure why Holcim wants to exit a big and profitable market like India. We are well aware of the environmental change that explains why Indian companies are now far less carbon intensive than their European peers. Large cement plants in India on an average use 30-40 per cent less energy per tonne of cement than the world average, and Dalmia Cement plants are among the most energy efficient in the country. Our company is on track to become net-zero by 2040, far ahead of both India’s national target or even ahead of many developed countries.

The industry is here to stay because you require cement whether you build a small home or a large infrastructure project. Currently, there is no substitute for cement.

Dalmia Cement plans to raise production capacity to 48.5 million tonnes (mt) by FY24 from 35.9 mt currently. Is such an aggressive expansion still feasible given the volume decline in the past two quarters, margin contraction, and a sharp rise in interest rates?

The demand slowdown and pressure on earnings from higher input cost are short-term phenomena and the industry will be back on the growth path by the second half of FY23. There has been no change in our growth plans. We have already spent Rs 1,700 crore on capex, out of our total capex budget of Rs 3,000 crore by the end of FY23. Capacity expansions are long-term projects and are not dependent on short-term fluctuations in demand or profitability. The recent rise in interest rate could raise our capex cost by 5-10 per cent over the long-term but it's more than manageable given our strong balance sheet with negative net debt. We will ensure that our overall debt doesn’t go beyond certain limits despite some incremental borrowings.

Lastly, interest rates follow a cycle and it could decline a few years down the line and the overall capital cost will average out the life of the project.

Most cement companies reported earnings decline in Q4 due to margin contraction. How bad is the situation on the margin front and how are you coping with it?

Margins will remain under pressure till the energy prices remain high. Last year, our operating margins were around 26 per cent and now it has declined to 20 per cent due to higher raw material, fuel, and transport cost. We are trying to protect our margins by passing some of the cost increases to consumers through price hikes. Simultaneously, we are cutting the use of high-cost fuels such as coal and pet coke and using more “green-fuel” like industrial wastes from chemical industry, municipal wastes, and biomass. These green fuels already account for 15 per cent of our energy needs — highest in the industry. We have also stepped-up blending of cement with fly ash, slag, and other additives that greatly reduces the overall energy usage.

We have doubled our renewable power capacity to 62.6 Mw and plans to make further investment in energy conservation programmes such as waste heat-recovery based power plants.