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Dalmia in talks to acquire new cement plants in India

World Cement,

According to its Managing Director, cement producer Dalmia Bharat Enterprises is in talks to acquire newly built cement plants to expand in a market where some new entrants, facing subdued demand and rising costs, are seeking to exit.

"Our firm view is that [the] time to invest is when there is pessimism and recession. That's not the time to run away. That's the time to have conviction and courage," Puneet Dalmia recently stated.

The company’s partner private equity firm KKR, which holds 15% stake in its cement unit, agrees with the acquisition, betting on long-term prospects for the sector.

"KKR is fully behind us and they have said for the right transaction, a lot of capital is available. So the capital firepower is not a problem. I think the question is can we get a return on the capital," Dalmia said.

The company also has a cash reserve of about Rs.2.5 billion, which it will use for the acquisition.

Dalmia Bharat Enterprises has current 13 million tpa cement capacity. Its plans to add 5 million tpa of capacity have slowed down as demand is sluggish and instead the company looks to acquire new capacity.

Acquisitions help consolidate the market and carry less risk compared with greenfield projects, Dalmia said, without giving details on the size or timeframe for acquisition.

Despite looking in many regions, Dalmia has suggested it prefers a company based in south and eastern India, where its current plants are. Reportedly, about 10 – 20 million t of cement capacity is available for acquisition.

Currently, India's cement industry is facing a demand crunch as a rising interest rate, sluggish policy decisions and global uncertainties have slowed the key consumers of cement: the infrastructure and real estate sectors.

New plants have further pressured capacity utilisation and cement prices across the country, forcing some new entrants, who set out to build plants driven by demand optimism and cheap credit available in 2007-08, to seek exit. These sellers are now getting more realistic about price expectation, boosting chances for a deal, Dalmia noted.

The company does not see demand for cement reviving in the next 12 – 18 months and expects prices to remain stable for the next 3-6 months.

"In [the] short-term, there are headwinds and there is demand contraction in states which lack political leadership," Dalmia said, adding that overall cement demand was growing at about 3 – 4%, much lower than the industry's expectation of 10 – 12%.

A stubbornly high inflation and rising interest cost are further denting the company's margins, Dalmia said. The cement maker has a current capacity utilisation of 60 – 65%.

Recently shares in Dalmia Bharat, valued at US$180 million, were trading 1% lower at Rs.107.95 in a weak Mumbai market.

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