DBEL should be listed by Nov 2010: Dalmia Cement

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Dalmia Cement has transferred its cement, power and other businesses into Dalmia Bharat Enterprises (DBEL) which should be listed by November this year, said its managing director Puneet Dalmia.

The residual stock which is a listed entity contains the sugar and renewable energy business, he added. Also, the cement and thermal power (20% of which is being sold on merchant basis) will be demerged into two wholly owned subsidiaries viz, Avnija and Dalmia Power.

The existing DCBL will continue as an integrated sugar company-Dalmia Bharat Sugar and Industries. Sugar cogeneration (cogen) is a significant part of revenues. "In a downturn cogen contributes roughly 60-70% of the EBITDA but when the sugar cycle is in an upturn, about 40% comes through cogen and 60% comes through sugar," he said hoping of a long-term solution to cane pricing.

Below is a verbatim transcript. Also watch the accompanying video.

Q: What is the current business, the listed entity - pure sugar?

A: Yes, it is basically sugar and renewable so we still have our power assets within this entity. We have about 80 megawatts of cogen assets and we have 16 megawatts of wind assets and we are also developing some solar projects. So this company will be a sugar and renewable company.

Q: But most of the revenues at least for the foreseeable future are coming from sugar, correct?

A: That's right. I think cogen is also a significant part of it. In terms of profitability approximately in a downturn cogen contributes roughly 60-70% of the earnings before interest, tax, depreciation and amortization (EBITDA) but when the sugar cycle is in an upturn it's about the other way round. So about 40% comes through cogen and 60% comes through sugar.

Q: Where is the sugar cycle now in your eyes? Have things bottomed out because today sugar stocks are all quite excited and the general feeling is that the worst maybe over?

A: The pain was so much that people were selling inventory below their cost of production. The hope in the market place is there will be some long-term solution to cane pricing. If the industry gets deregulated then the fortunes of the industry will change and that will be a significant discontinuity in the industry. The market is hoping there will be some regulatory solution to create smoother earnings profile in this industry and maybe that is getting factored in.

Q: How far is the next up cycle in sugar in your eyes?

A: It's very hard to predict. This industry is plagued with government interventions so it is not purely a demand supply kind of forecast. Whenever demand exceeds supply, government intervenes to artificially bring down prices and whenever supply exceeds demand, there are huge issues with respect to arrears in cane payments.

So this is an artificial industry in terms of regulation. It's very hard to predict. My view is that given the fact that there are cash losses right now, I do not see further downside from here. If at all I see an upside but how long will that upside last depends on the extent of solutions found to the pricing of cane.

Q: Cement and thermal power businesses will go into Dalmia Bharat Enterprises, when is that listing?

A: We hope that the listing will get concluded in the next six weeks. I think sometime in November we should get the listing through.

Q: You have kept the thermal power business though in a 100% subsidiary. Is there a further spinning off that you are envisaging on some point maybe sugar remains in one, cement in one and power gets hived off into a third company?

A: Right now in the thermal power business we have around 72 megawatts of captive capacity out of which we are selling 20% on merchant basis. We are trying to develop a merchant power business around this nucleus because we have technical skills to execute these projects.

Right now the company is in early stages of development so only when it gains critical mass and it is ripe for listing we may consider that at some point in time. But this is an enabling structure to look at the power business seriously and spinning off etc is easily three-five years away.

Q: For now how is cement looking which is a core income and revenue generator for the company which will list in six weeks? How is that business looking?

A: My view is cautious. There is enormous amount of surplus in south India and the demand growth has surprised us negatively. We had assumed that an 8-10% demand growth is easy to achieve but because of the situation in Andhra Pradesh the demand growth has been only about 4% this year.

My view for the next 18-24 months the business outlook is cautious at best but the monsoons are likely to get started next quarter. From January onwards I presume that demand will look good and hopefully the prices will also sustain at a higher level than what they are presently at.