Saw flat margins due to high cost of coal: Dalmia Cement

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Dalmia Cement (Bharat) has declared its first quarter results. Its net sales were at Rs 557.6 crore versus Rs 414.6 crore.

The company's sales and EBITDA went up on a year-on-year basis because of volume growth, Puneet Dalmia, the company's managing director, said. "We got volume growth because our Andhra Pradesh facility got commissioned and we had slightly more favourable pricing environment. However, on the cost side, we have been carrying high cost coal in both our Tamil Nadu and Andhra facilities, which got consumed in the first quarter of this year and therefore despite volume and pricing growth, margins have been slightly flattish," he said.

Here is a verbatim transcript of Puneet Dalmia's exclusive interview on CNBC-TV18. Also watch the accompanying video.

Q: There has been a growth when it comes to profit after tax (PAT) and revenues. The margins look a little bit under pressure. What happened?

A: Our sales and EBITDA have gone up as compared on a year-on-year basis because of volume growth. We got volume growth because our Andhra Pradesh facility got commissioned and we had slightly more favourable pricing environment. However, on the cost side, we have been carrying high cost coal in both our Tamil Nadu and Andhra facilities, which got consumed in the first quarter of this year and therefore despite volume and pricing growth margins have been slightly flattish.

On the other hand, the sugar business did well. We are seeing positive contribution from the sugar business. We just did not have enough stock to sell at the very good prices. We were also able to get better realization for our power. We were also able to import raw sugar, which we processed during this quarter that added to sugar profitability.

Q: Let us talk about your cement business because considering the larger chunk almost 80% plus comes in from your cement business. There seems to be a concern on the street considering you are concentrated largely in South India and the kind of pricing environment that we have seen in South India, you hope to cope up with this with more front loaded capacity additions?

A: We are seeing a flat pricing environment in Tamil Nadu and Kerala, which accounts for about 70% of our sales. However, in the new two states that we are getting into - Andhra Pradesh and Karnataka - we have seen a slightly falling price environment in the first quarter. We have always maintained that cement is a cyclical business and will remain a cyclical business so we do expect some pricing pressure in the second half of this year or definitely in the fourth quarter of this year. We believe that with better cost management and volume ramp up we should be able to deliver significant profit growth despite softening of price environment. We also believe the softening prices may not be a very long term phenomena because we are seeing very robust demand growth numbers at the all-India level and demand is still growing at 12%. We think that the demand growth will absorb all the additional capacity which is coming in the next 18-24 months.

Q: Are you looking at diversifying anywhere across South India as well when it comes to your cement business?

A: Right now, we are very focused on getting our existing capacities ramped up properly and getting established in the market. Once we are able to establish the current position we will examine our growth pipeline.

Q: What is your capacity addition timeline because you had guided for almost a capacity of 9 million tonne by about September?

A: Yes. Our capacity in Dalmia Cement will be about 9 million tonne by September. Also we have a stake in Orissa Cement, which has a capacity of about 4.3 million tonne so the total capacity in the group in the South India and East India will be close to 13 million tonne by the end of this year.

Q: How are you tackling fuel and freight charges and how is the reduction of international coal prices benefiting you and when will it start trickling in to your margins?

A: Coal prices have softened quite significantly as compared to September 2008. They have come down from almost USD 200 per tonne on a cost, insurance, freight (CIF) basis to now about USD 115 per tonne. We will get the benefit of this from Q2 and Q3 onwards. We expect our freight cost to go up because of increase in oil prices and increase in our lead distances. We have commissioned a plant in Andhra Pradesh and we will have to sell far away from our current position. So our lead distance may go up from 350 kilometers on an average to about 500 kilometers and that may impact our freight cost by about Rs 100 a tonne overall.