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Dalmia Cement (Bharat) Ltd.

Industry: Cement CMP (08/04/10): Rs. 253.05 (NSE) P/E Ratio: 12.91 BSE Code: 500097 ISIN No: INE495A01022 EPS: Rs. 19.60 NSE Code: DALMIACEM Face Value: Rs. 2/- M-Cap: 2,048.17 cr

April 8, 2010 About DCBL

After being established in 1935 by Jaidayal Dalmia; the cement division of DCBL was commissioned in 1939 thereby enjoying a heritage of over 70 years of expertise and experience. The company is headquartered in New Delhi but has its operations in cement, sugar, travel agency, magnesite, refractory and electronic operations spread across India. The Dalmia Group had established four cement plants in pre-independence years, two of which were affected by the partition and Independence. The remaining two plants operate under DCBL. The company has made strategic investment in Orissa Cements Limited (now known as OCL India Ltd). Behind the sustained growth and innovation of the company for the past seven decades is a professional management team led by Mr. Puneet Dalmia, their enterprising Managing Director. DCBL takes pride in itself on having been at the forefront of pioneering and introducing many new technologies, which are followed by others in the industry. DCBL has been and continues to be an industry leader in the niche market segments. Currently the company stands as one of the most profitable players in the industry, with sustainable high margins and strong financial backing its efforts. The enterprise has moved up the value chain on a year on year basis with a consistent record of making profits and paying dividends, thereby making the company financially strong and stable. DCBL has two major business segments i.e. Cement and Sugar which it is committed to expand. Cement production has been expanded from a meager 1.5 million tonnes [MT] to 9 MT. Sugar production now stands at over 300,000 MT per annum. DCBL expanded its cement footprint in the Southern India with its Greenfield projects in the Kadapa district of Andhra Pradesh and Ariyalur in Tamil Nadu which added an additional 5MN tonnes capacity.



The Unique Selling Point (USP) of this company is the quality of its products and the ability to successfully innovate newer ones. The company has already given India several vital projects from dams to critical defence installations and also created special cements for special applications with newer and innovative technologies. This spirit of innovation has fuelled the development of specialty cements for special needs – which include strengthening Airstrips, concretizing Railway Sleepers and cementing Oil Wells. DCBL’s Major Operating Divisions Cement Division As stated earlier, the cement division of the company was commissioned in 1939. This was one of India’s first cement plants with an installed capacity of 91,250 tonnes of cement per annum (250 tonnes cement per day). The plant today has grown by manifolds in terms of its capacity. When compared on key efficiency parameters, DCBL ranks among the best in the industry. The company has set up over 53 windmills in Muppandal (Tamil Nadu) to generate inexpensive and eco-friendly captive power for its plant. As the plant is located close to its source of raw materials, the freight and transport costs are low, giving the company an edge over its competitors. Over 65% of the cement consumption in India is catered to by the retail segment where branding and distribution are the critical drivers for leadership. DCBL is the only single unit cement manufacturer to successfully market its brands in core markets at prices on par with those of larger consolidated/national players. In the states of Tamil Nadu and Kerala, which are among the fastest growing in cement consumption, DCBL enjoys a significant market share currently. DCBL enjoys a very high brand recall among consumers and influencers while its relationships with its dealers are very strong. In some cases these relationships are as old as over the past three generations.



(Table 1)

From the above table we can see that currently DCBL and OCL (45% held by DCBL) have witnessed growth in cement production and its dispatches. This trend is bound to continue till monsoons arrive. One key point to notice here is that DCBL operates mainly in Southern India where prices are soft as compared to other parts of India. However OCL mainly operates in North-Eastern India, where there is demand rush and supply crunch. (Refer the earlier Cement Report – viz-a-viz Barak Valley Cement). Post monsoon, the cement demand is likely to rise again as Government of India is pushing hard for infrastructure development. Even the recently announced concretisation of roads will boost cement demand in coming days.



(Chart 1A) (Chart 1B) We can see from Chart 1B the main areas of operation of DCBL and that of OCL. From Chart 1A we can see the growth trajectory of DCBL in terms of its financials as well as its capacity expansion over the past few years. Sugar Division By mid-nineties, DCBL embarked to manufacture sugar and set up its unit at Ramgarh Chini Mills in Distt. Sitapur, U.P. The company currently has an installed capacity of 22,500 TCD (tonnes cane crushing per day) which is way higher than what it started with at 2,500 TCD. Currently DCBL operates three sugar production units, which are two more than at the time of inception of the sugar division in 1994. The sugar division contributes significantly to the company’s revenues. Therefore DCBL aims to build deeper capabilities for its sugar segment. The sugar manufacturing plant incorporates state-of-the-art technology that ensures high productivity. DCBL has carried out expansions adopting the latest technology available. The production units of DCBL boast of one of the very few sugar mills that have ushered in the latest technologies in business. Take for example the Installation of constant torque drives for mills, using Programmable Logic Controllers (PLC) for mill & boilers. A fuzzy logic system for pan boiling had been introduced for the first time in the world sugar industry with complete success in pan boiling which has given considerable advantage in obtaining consistent lower purity of final molasses and reduced losses in the process with increased productivity. The various process parameters are monitored using advanced instruments, which give instant information so that corrective action can be taken instantaneously in the interest of consistent sugar quality.



Due to emphasis on quality throughout the process, DCBL produces high quality of sugar both in terms of grain size and colour, which leads to better realisation in comparison to competitors. Furthermore, DCBL has become a name to reckon in the market. The company is active to the needs of its customers. It has generated goodwill and confidence, which in turn has ensured better realisations.

Research & Development (R&D) Division

DCBL conducts its R&D from its in-house R & D facility. The company also has an independent Research Center set up at Salem under Dalmia Institute of Scientific and Industrial Research (DISIR), a Scientific and Industrial Research Organisation (SIRO) approved entity. The key area of focus for this division is “Product Development”, particularly special cements, energy efficiency (both power and fuel), optimization of raw material resources, increasing inputs of blending component particularly Fly Ash in PPC and thereby improving quality of all the products made by the company to international levels. The R&D division of DCBL boasts of the success that it has brought to DCBL. It developed a first of its kind cement in the country – which belongs to the area of Oil Well Cement; a product claiming essential import substitution and saving lot of foreign exchange. It also helped DCBL take credit for the development of railway concrete sleepers. Besides such “first time products” this division of DCBL has also introduced “first time concepts”. These include the concept of computerized mine planning, Vertical Roller Mill (VRM) for cement grinding, and expert cement for controlling kiln operation. As DCBL believes in maintaining highest level of quality, special emphasis is placed on R&D facilities to augment each product quality. Each division has a well-equipped R&D cell, pursuing product and process improvements related to that division. The company boasts of state-of-the-art manufacturing facilities including an on-line X-ray analyzer, a modern Stacker Reclaimer, computerized mine planning, environment friendly electrostatic precipitators and a host of other technological features. Constant control by hi-tech systems at every step of the manufacturing process ensures that every bag of cement that rolls out of the factory is of the highest quality. DCBL was the first to use a computerized planning package for limestone mining, to ensure consistent raw material composition. DCBL also remains amongst a few who use Automatic Kiln Control software (based on fuzzy logic), to ensure superior clinker quality. The company recently introduced the latest Cement Vertical Rolling Mill (CVRM) technology for cement grinding. The ISO 9002 certification and American Petroleum Institute (API) monogram for the Oil well Cement speaks volumes about the superior performance of the entire Company.



DCBL has ensured tremendous customer satisfaction via leadership and popularity amongst its customers; not to forget its consistent quality conforming to international standards, a perfect ecological balance and low cost energy efficient operations which have given DCBL the status of a market leader and enabled the company to stay among the top. DCBL on the Charts

(Chart 2A)



(Chart 2B)

(Chart 2C)



Having a look at the charts of DCBL, we can see one thing that is common among all three charts (Chart 2A, Chart 2B and Chart 2C) and that is the outperformance of DCBL viz-a-viz the Nifty Index. Chart 2A shows its performance over the past five years (January 1, 2005 till April 7, 2010). Chart 2B compares the performance during the year 2009. Whereas the chart 2C shows the price performance from beginning of 2010 till April 7, 2010. One important point to keep in mind looking at the above charts is that the Face Value of the company was split from Rs. 10/share to Rs. 2/share with effect from November 8, 2005. So we would have to consider the adjusted values on previous dates. As we can see that the highs touched previously post the split is close to Rs. 600/share. It is possible that we could see such levels again due to the proposed demerger scheme recently approved by the company to expand and focus on its business divisions and raise more funds as separate entities. DCBL has kept shareholder value unlocking in mind while taking this decision. The demerger is discussed ahead in the report.

Mubin Panjwani’s Quote for the stock “Stars are born when they constantly outperform peers. They exceed your expectations by those

limits thereby making you greedier and being left wanting for more. And just when you rubbish the

idea of its future performance, it dazzles you again by its continuous outperformance and having

left your expectations way behind, once again.”

Financials The total income has grown at a CAGR of 46.41% from Rs. 434.65 crores in FY04-05 to Rs. 1,997.31 crores in FY08-09. Similarly the Net Profits have at a CAGR of 58.13% from Rs. 25.37 crores in FY04-05 to Rs. 158.63 crores in FY08-09. During the same time period, DCBL has constantly paid dividend over 100% since past 4 years and in FY04-05, it paid 50%. The PE of the stock price is 12.90 times which is towards the lower band in this industry and it’s EPS of about Rs. 19.60/share. With sugar prices stabilized and supply crunch of sugar the prices have increased tremendously over the past year and this will reflect in this year’s financials. Also the cement prices are on the move again. This will augur well for the company, as over 70% revenues are from cement division. What is to be kept in mind is that greater growth potential is possible once the demerger scheme is materialized.



Shareholder value unlocking – Demerger scheme

Under the demerger scheme, DCBL will demerge the cement undertaking, refractory undertaking, thermal power undertaking, and other businesses into Dalmia Bharat Enterprises Limited (DBEL), which at present is the wholly-owned subsidiary of DCBL. Further, the cement and thermal power undertaking will be demerged into two wholly-owned subsidiaries i.e. Avnija and Dalmia Power Ltd. respectively. The sugar operations will be retained under DCBL. DBEL will issue 1 equity share of Rs. 2 each of DBEL for every one equity share of Rs. 2 each held in DCBL. (Almost like a bonus issue of 1:1, only better as a new entity is created and offers higher growth potential) DCBL currently produces around 160 MW of Power through thermal and renewable energy with an aim to increase the power generation from non-conventional methods. The company sells its excess power on merchant basis and is looking to expand in this segment as well post the demerger. Given below are the organizational structure and how this company currently operates and how it will operate post the demerger.



Pre- Demerger Structure

(Chart 3A)

From the two charts, Chart 3A and Chart 3B, we can see how the cement, sugar, refractory and power divisions will be separated. Once this demerger is done, The Dalmia group will most likely look to raise funds for the expansion plans of each of their businesses. Furthermore, there could be a possibility of a further demerger / separate listing of the Power venture business in future.



Post Demerger structure

(Chart 3B)



The following is the breakup of a few financial parameters upon the demerger scheme:-

(All in Rs. Cr) Before Restructuring

(9M’FY10)

Post Restructuring

(9M’FY10)

DCBL DCBL DBEL

Revenues 1,771 471 1,300

EBITDA 413 82 331

Depreciation 94 28 66

EBIT 324 54 270

Net Fixed Assets 2,795 617 2,178

Net Current Assets 491 244 247

Investments 471 8 463

Net Debt 1,547 486 1,061

Key highlights of DCBL

1. DCBL is the 3rd largest Cement player in south India. 13% market share in key markets.

2. Having 45.3% stake in OCL, thereby an added dominance in Eastern India with 5.3 MT capacity.

3. CAGR over 25% over past 4 years – faster than industry.

4. DCBL commissioned the Kadapa plant within 24 months, as against the Industry average of 30-36 months.

5. By 1993 DCBL became the first company in South India to obtain ISO 9002 certification and second in the country among the Indian Cement manufacturers.

6. In 2004, DCBL became an ISO 14001 Certified company. Its efforts in sustaining growth with responsibility have merited many notable awards for Energy Conservation & Efficiency, Safety, Health & Environment issues from the Government and other reputed agencies.



Recent Article in Construction World magazine:-



Comparisons

(In Rs. crores) DCBL Andhra Cements India Cements Madras Cements

Net Sales 1997.31 371.12 3951.56 2538.50 Other Incomes -35.88 0.00 2.97 6.96 Total Incomes 1961.43 371.12 3954.53 2545.46 Operating Profits 525.65 60.81 1040.23 786.54 Net Profits 158.63 63.01 432.18 363.52 EPS (in Rs.) 19.60 2.89 15.30 15.28 CMP @ NSE (08/04/2010) 253.05 28.00 138.20 125.55 P/E Ratio (in times) 12.91 9.68 9.03 8.22 Book Value (in Rs.) 148.95 5.24 105.00 52.96 P/BV (in times) 1.70 5.34 1.32 2.37 OPM (in %) 28.53 14.34 27.94 30.75 NPM (in %) 8.65 10.34 12.44 14.27 Dividend (in %) 150 0 20 200 Equity Share Capital (ESC) 16.19 132.53 282.43 23.80 Reserves 1189.38 -63.10 2683.03 1236.40 Reserves/ESC (in times) 73.46 NA 9.50 51.95 Face Value (in Rs.) 2 10 10 1

The above comparison table compares a few South India Cement manufacturers. The first thing to be noticed is that the Reserves are 73 times its ESC. One reason that it has lower OPM and NPM is due to the fact that it is a conglomerate involving sugar business, which did not have too good a year last FY, and its refractory business; both of which involve lower margins than pure cement manufacturers. Similarly the PE ratio is higher as it involves other business activities. However when you see that P/BV is low at 1.70, we can see that it has further room for appreciation.



Conclusion Post the demerger DCBL will have different entities to handle their businesses. This will give them muscle power to raise more funds than they could from a single entity. These funds are going to be utilized for further expansion plans. The management has already envisaged further fund raising plans for increasing Cement capacity. Power generation also will be increased gradually as the Dalmia group wants to enter this segment of business also. DCBL looks a good opportunity for the long term.

Disclosure:-

• Mubin Panjwani nor any research team member holds DCBL currently.

With regards,

Mubin Panjwani,

Head of Research & PMS Fund Manager

dalmia cement (bharat) ltd - fams - financial assets managed simply™ research

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