Forbes India 15th Anniversary Special

Cement is not a 'winner-takes-all' business; companies sink and swim together here: Puneet Dalmia

The managing director of Dalmia Bharat believes industry supply will outstrip demand in the short-to-medium term even as leading companies race to ramp up production capacity

Neha Bothra
Published: Dec 5, 2023 12:34:30 PM IST
Updated: Dec 5, 2023 12:48:38 PM IST

Cement is not a 'winner-takes-all' business; companies sink and swim together here: Puneet DalmiaPuneet Dalmia, MD, Dalmia Bharat Group

The domestic cement industry is expected to see a volume growth of about 8 percent this fiscal year, largely on the back of rising demand for affordable housing and the government’s massive capex gambit of Rs 10 lakh crore. Against this backdrop, leading cement companies have announced aggressive expansion plans. In fact, last week, UltraTech, the largest domestic cement manufacturer, entered an agreement to acquire Kesoram Industries’ cement business in a Rs 7,600-crore deal to expand in the southern and western regions.  

“There is a lot of optimism about the future, and when there is optimism, a lot of people invest, and typically there is over-investment. There is a high probability that supply will outstrip demand,” said Puneet Dalmia, managing director, Dalmia Bharat, in an interview on Forbes India Pathbreakers in October. “It is not a straight road to paradise. It's a bumpy road and right now margins are at a 20-year low.”

Private capex has been tepid and consumer demand is yet to pick up meaningfully across sectors. In a wide-ranging conversation, Dalmia talks about why he sees possible pain in the cement sector in the coming months, how he expects the top players to expand their footprint in the coming years, and what cement companies can do to reduce carbon emission “without killing the business model”. Edited excerpts:

Cement industry: ‘High probability that supply will outstrip demand’

India is a large market and India will be a market that will continue to grow for the next foreseeable future. So, I expect demand to be reasonably strong. At the same time, there is a lot of optimism about the future, and when there is optimism, a lot of people invest, and typically there is over-investment. I think even now the industry is running at 70 percent utilisation.

There is a high probability that there will be over-investment and the supply will outstrip demand. I feel there could be a time when utilisation levels will go low in the industry if the demand does not keep pace with what we have forecasted. It is hard to forecast exactly when it will happen or for how long it will happen.

There is likely to be consolidation because the top four players are going to grow faster than the industry and they will have the ability to either build new capacity faster or acquire capacity based on multiple scenarios: Some people may see cement as a non-core business, some people may want to exit due to distress etc. So, I think, people who want to play cement should play it with a long-term view. It is not a straight road to paradise. It's a bumpy road and it's a low-margin business. Right now, margins are at a 20-year low. So, in the short term, I think we are facing headwinds.

Also read: Entrepreneurs should not get scared of multinationals and companies with a lot of money: Puneet Dalmia


But if you have the appetite and the stomach to ride the roller coaster and to ride this cycle, then this is a very attractive sector to be in. It is a domestic business, there is a large domestic market, there are no import threats, and it's a product that requires efficiency and good distribution. But I believe that consolidation will happen and the demand-supply thing may not be as perfect as it is sometimes forecasted.  

Industry dynamics: ‘This is a business where you sink and swim together’

It's hard to forecast [how the pecking order of top cement players will change] because everybody wants to grow. Now, how will things change? It's hard to forecast and it's not a winner-takes-all business. This is a business where you sink and swim together and if prices fall, it affects everybody. It may affect some people who have more debt much more severely. If you have a strong balance sheet, you can survive in this business. Broadly, the top four or five players seem to be the ones. But who knows? There could be some people who can be more aggressive or want to take more risk and we will see. There are four or five players who have really serious plans and a good management team and a track record to execute:

1. UltraTech is the number one company in cement. I think they have plans to go to 200 mtpa and I think they are a company that we admire and respect.

2. Adani has come in. They've announced plans to go to 140 mtpa. I think the cement balance sheet is very strong and I think if you look at Ambuja cement, it has zero debt, it has net cash and it has a great cash flow. So, I would say that financing the expansion, which they have announced, is not at all difficult. And I think they have an exceptional track record of executing very tough projects. They have great brands, they have a great team, and I think with Karan Adani, who is now leading the cement business, they have a young, focussed entrepreneur who is very sharp, and we have a lot of admiration and respect for them. So, I am sure they will do a great job in execution.

3. Shree Cement has a terrific track record in execution and building new plants. They have not done M&A so far, but they have said that they are open to M&A and I think they will grow. They are the lowest cost producer and have done a great job.

4. We [Dalmia Bharat] want to build a business that is sustainable, predictable, and which has scale. We have guided the market that we will try to build a company with 110 to 130 mtpa capacity by 2030-31.

5. JSW also wants to grow in this sector and they have announced plans to go to 50 mtpa.

Also read: Cement's big boys get bigger

Green energy: ‘Important for cement companies to grow in an ecofriendly manner’

I think this is the most important question in the cement business. Cement, as you know, generates around 7 percent of the world’s CO2. How do you ensure that you grow in an ecofriendly manner is a very, very important question. We are proud that we are one of the greenest cement companies in the world and if I look at our carbon footprint, it is about 30 percent lower than the world average and 15 percent lower than India's average carbon footprint. So, I think we are very proud of that.

We also think that there are two areas where there is a lot of visibility on how to reduce the carbon footprint. One is moving from fossil fuels to alternative fuels and the second is to move from thermal energy to renewable energy. All companies are going on this road map. The unknown today is how do you reduce the carbon footprint in calcination, which is the main process. When you burn limestone, carbon dioxide comes out.

Globally, many governments are giving subsidies for carbon capture. These are very expensive investments, $500 million, billion dollars, to capture carbon, and sequester it in the ground or potentially sell it. I think in India, this is not going to happen. We cannot expect, and neither do I encourage this, that companies take subsidies from the government for capturing carbon. It is our job to be responsible. We can't load this on the Indian government or the Indian taxpayer.

There are some innovations that are going on. None of them are commercially scalable as of now. So, one, we are keeping a track on what are the new technologies that are coming up in this space where we can think of lowering the carbon footprint in calcination. The second thing is, can you do a natural carbon sink? Can you plant lots of trees and ensure that they survive and they create a natural carbon sink? I think that could potentially be viable if you do it in wastelands of the government. We are studying that and we are seeing whether instead of investing hundreds of millions of dollars in carbon capture, can you do a natural sink? But still early days, I think this will evolve and it has to be done in a manner that does not kill your business model.