Business Today

Breaking away from the past

Puneet Dalmia has injected into his group a strong appetite for growth - something it lacked for six decades.

N. Madhavan        Print Edition: July 25, 2010

THE PAST...

  • Growth ambitions at Dalmia Cement were limited.
  • It was averse to risks and preferred marginal growth.
  • Loyalty and effort were two attributes that were rewarded.
  • The cement operations lacked a sharp focus.

... AND THE PRESENT

  • It is hungry for growth, driven by the NextGen, which is both ambitious and aggressive.
  • Risk taking is part of the game. The company has grown over 10 times in just four years.
  • It plans a capacity of 35 mtpa in the next 10 years.
April 1999: the top management of Dalmia Cement (Bharat) Ltd (DCBL) at Dalmiapuram, near Trichy in Tamil Nadu, is in a huddle. Dharani Cements, a mini cement plant, is up for sale and the discussion is on whether DCBL should bid for it. The advantages of taking over the 0.7 million tonnes per annum (mtpa) mini cement plant are many. It is located near DCBL's existing facility.

It has limestone reserves across 800 acres that have the potential to yield 92 million tonnes of high quality raw material. A capacity expansion is under way at Dharani and the new capacity will be available in 18 months. DCBL is sitting on a pile of cash but, after extensive deliberations, the management decides against taking any risk and backs off. Eventually, Grasim Industries acquires Dharani Cements for Rs 52 crore.

Cut to 2005-06. In a span of 12 months the DCBL management clears three projects that will add capacity to the tune of 7.5 mtpa involving an outlay of close to Rs 15,000 crore. A 2.5 mtpa capacity is cleared at the existing facility in Dalmiapuram while the other two additions are in new locations - at Ariyalur near Dalmiapuram and at Kadapa in Andhra Pradesh.

The activity of those 12 months aptly illustrates the change in attitude at the 65-year-old cement maker. That bustle is also responsible for taking the company on to a different level, from where it can aim to become a pan-India player, with a size and scale that comes closer to the industry's leaders. It has metamorphosed from a single location, single unit cement company with a paltry capacity of 1.2 mtpa into a mid-sized player with a capacity of 9 mtpa.

Over the past four years, it has also been managing its group concern Orissa Cements Ltd (OCL) and in January 2010, DCBL acquired another 24 per cent stake (it already had 20 per cent) from Yadu Hari - the father of Puneet Dalmia, the 39-year-old Managing Director of DCBL. Including OCL, DCBL's effective capacity as of 2009-10 stood at 14.4 mtpa.

A 12-fold capacity increase in four years sounds great, but Dalmia isn't satisfied. In fact, his game plan was to add another 10 million tonnes by now but a sharp fall in demand, over-supply and the resultant poor prices hurt his profits (and cash flows) forced him to slow down. He's now aiming to have a nationwide presence over the next seven years with a cumulative capacity of 34 mtpa. The largest cement company in India is Grasim (which includes UltraTech Cement) with a capacity of 48.5 mtpa.

To achieve that, Dalmia also restructured the various businesses under him. Unil last year, cement, sugar, refractory and power businesses were all under DCBL. Effective April this year, a new holding company, Dalmia Bharat Enterprises (DBE), was created and the cement and power businesses were brought under it. Sugar and refractories remain with DCBL. DBE will get an automatic listing in due course. "The urge to grow is due to the aggression and ambition of the younger generation," says Dalmia, who entered the family business in 2004. Before that, the company was managed by his father and uncle Jai Hari.

Dalmia had his task cut out. Mindsets had to be changed, people had to be shaken out of their complacency and risk-aversion, and performance, rather than just loyalty and effort, had to be rewarded. What's more, the organisation was not geared to face contingencies.

Example: While expanding the Dalmiapuram unit, 13 people died in an accident at the project site. The senior management did not know how to handle it. "Then, when the new plant had teething problems, they were struggling to come to terms with it," explains T. Venkatesan, CEO for Cement and Executive Director.

For Dalmia, DCBL was an altogether different animal from his first start-up - in 1999 he had founded jobs portal jobsahead.com with Rs 2 crore and sold it in 2004 to monster.com for Rs 40 crore. The challenge at DCBL was more of change management. First task: to build a new team with performance and competence as the rewarding factors.

As part of the restructuring, the company also got its own corporate office - earlier, individual plant heads of the sugar and cement units reported directly to the family members. A human resources development function did not exist. In fact, Amandeep Gupta, the current Executive Director, HR, had to type his own appointment order. Professionals were brought in to head each strategic business unit (SBU) and family members were elevated.

The move to give cement a sharper focus paid immediate dividend when private equity player Kohlberg Kravis & Roberts (KKR) in May 2010 invested Rs 750 crore in Avnija Properties Ltd, an unlisted company under DBE that holds the cement business.

A part of the money (Rs 250 crore) will go into repaying loans - the debt-equity ratio will decline to about one from 1.4. The balance is available for funding expansion. "This is a longterm investment in a good family business, its management team and in India's growth," said Sanjay Nayar, CEO of KKR India while making the investment.

However, Dalmia is not bullish on sugar - where it has a capacity of 22,500 tonnes of cane crushed per day across three locations in Uttar Pradesh. "We do not want to make a large capital expenditure in the sugar business due to government interference and the volatility it creates. We are looking at low cost growth models such as leases or management contract for growth here," he says. The SBU for power has a capacity of 72 MW, of which over 20 MW is exported to the grid. DBE has plans to invest in thermal power plants.

The changes over the past few years have set DBE up for another round of furious expansion. The first target is to add 10 mtpa and take total cement capacity up to 24 mtpa by 2013-14. These capacities will be put up in Karnataka, Meghalaya and Rajasthan. The company is ready with the limestone reserves, mining leases, land for the plant and the necessary environmental clearances.

It also has a $700 million (Rs 3,250 crore) line of credit from a consortium of 23 banks. The third round of expansion, for which preliminary work has already begun, will involve putting up another 10 mtpa, most of it in North India. "In the next three years, we would have acquired the land for the plant and the required environmental clearances," says Dalmia, adding that the mining leases are ready.

So, where does Dalmia - who is also set for a bout of acquisitions - see DBE a decade down the line? He expects the Indian cement industry to have a capacity of 500 mtpa in 10 years, up from 256 mtpa currently. There will be two very large players with 100 mtpa each and 10 large players accounting for another 250 mtpa.

"We will, for sure, be among those 10," says Dalmia. An equity analyst with a Chennai-based mutual fund, adds: "The cement industry's long-term growth prospects are good. Demand will rise at a compounded annual growth rate of 12 to 14 per cent over the next five years. India needs to add 20 mtpa every year. Considering these, Dalmia's growth plans are not overambitious."

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