Puneet Dalmia , MD, Dalmia Bharat Enterprises in an interview with ET Now talks about the cost pressures of the industry and the possibility of a price hike.
How do you define the recent strength in cement prices, just a regional adjustment or good times are back for cement companies?
The sector is facing severe cost pressures. The global energy environment is quite unfavourable and coal prices have gone up very significantly. Coal India recently raised prices by about 30%. Similarly our logistics cost, which is dependent on diesel prices has also gone up very significantly.
Part of this is due to passing on the cost increases partially to the consumer. We have also seen a part increase in excise duty in the recent budget, so that has also been passed on partially. Margins will be stable to negative, so we are not seeing a big increase in profitability. Overall, the current margins in the industry still do not encourage reinvestment, so the key issue that we face as a sector is that there is cyclicality and there is volatility but how do you keep encouraging reinvestment to support the long-term demand that is going to accrue in India if infrastructure investments are to happen. I am a little cautious about the short term, which is the next 24 months.
How much of a price hike have you at Dalmia Cement undertaken?
If I look at year on year, perhaps the prices have increased year on year by about 6-7% but if you look at quarter on quarter in Q2, the prices had dipped very significantly, so from Q2-Q4, the prices have gone up by about 15-20% but on a year on year basis, it is about 6-7%.
Are you looking at an immediate price hike in the near term as well?
Most of the price hikes have happened and at least in the near term, I see prices as more or less stable in the current market. In south India, especially the demand growth is yet to kick in and we see political indecision in some of the states like Andhra Pradesh where the capex cycle is yet to catch up, so the demand outlook for Andhra Pradesh is quite negative and unless demand picks back on a sustainable basis, we will continue to see some volatility in prices in the sector.
If raw material prices continue to move up, are you in a position to consider a price hike or that's it, cement companies are in no position to consider a price hike?
We will have to see it quarter by quarter based on the demand outlook, so for example if in the monsoon quarter, the construction activity slows down, that's a time when prices are a little soft and you may see prices coming down.
In the March quarter or the June quarter, demand is usually quite robust, so based on the demand outlook, prices are generally firmer, I would say that given the current situation, most of the demand growth forecasts have been factored in and unless we see a very good June quarter, prices are going to remain stable where they are today.
What is your current plant utilisation?
We have put up a lot of new capacity in the last 12 months, so new capacities take time to ramp up. We are running our new plants at about 50-60% capacity utilisation, which is reasonably good for the first couple of years. We also feel that at an overall level, capacity has to be defined very carefully because the product mix can change nameplate capacity quite significantly.
If you make fly ash based cement or slag cement, the same plant can produce 1.5 times the cement that it can produce otherwise. So in an infrastructure-lead boom where we usually sell OPC, which is Ordinary Portland Cement, that has less output-to-input ratio. Typically in an infrastructure-lead growth phase, that market likes different product quality, so plant capacity utilisation varies depending upon which market you serve, so we have to be careful when we look at the capacity utilisation levels and see what product segment are you catering to.
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