Cement : Positive road ahead
Accelerated implementation of road projects lifts sentiments
Budget provisions
| Category |
Excise Duty |
Basic Customs Duty (%) |
| Existing |
Proposed |
Existing |
Proposed |
| Portland Cement |
Rs 350/ tonne |
Rs 350/ tonne |
25% |
20% |
| Cement Clinker |
Rs 200 / tonne |
Rs 200/ tonne |
25% |
20% |
| White Cement |
32% |
16% |
35% |
30% |
Excise duty is for large cement plants.
Budget provisions Vs Expectations
| Parameters |
Expectation |
Proposed |
| Specific rate of excise duty |
To continue |
continued |
| Royalty on limestone |
To be reduced |
No reduction proposed |
| Import duty on non-coking coal |
To be reduced |
No reduction proposed |
| Customs duty on cement |
To be increased |
Reduced from 25% to 20% |
| Infrastructure projects |
Increased thrust on infrastructure |
Budget allocation for infrastructure projects increased; project funds for Golden quadrilateral tied up and expected to be completed ahead of schedule. |
| Thrust on cement / clinker exports |
50% concession on railway freight on cement / clinker exported sought. Government should negotiate with Srilanka and Bangladesh to remove import duty on cement / clinker exports to such countries. |
Not proposed. |
| Increased thrust on Housing sector |
Remove restrictions on conversion of agricultural land to industrial / commercial purposes, repeal of Urban Land Ceiling (Regulation) Act in the remaining states etc. |
Thrust on conversion of agricultural land to industrial / commercial purposes. Repeal of Urban Land Ceiling (Regulation) Act likely to be taken up with states. |
| Remission of Excise duty |
By 50% or deferment of excise duty on cement for roads for 5 to 10 years. |
Not proposed. |
Reactions
Mr.T.M.M.Nambiar, President of Cement Manufacturers Association and the Managing Director of Associated Cement Companies welcome the enhanced plan outlay for roads and highways and for Pradhan Mantri Gram Sadak Yojna and the provision for infrastructure fund.
He further added, " However, it is disappointing that no boost has been given to the housing sector. Reduction of import duty on cement / clinker is unlikely to affect industry, as Indian cement is very cost effective. However, import duty on coal should have been reduced. The finance minister has missed an opportunity to come up with bold measures to stimulate the economy.
Industry Status
The cement industry is buoyed by the spectacular 8.49% growth in cement dispatches for the ten months ended Jan’01. Increase in infrastructure spending and improvement in rural income leading to increased demand for housing has made the industry confident of continued good spell for the industry.
In its eagerness to improve the dispatches, the industry failed to hold on to price line. The prices had a free fall and due to concerted efforts including rationalisation of supplies, the supply discipline was partially restored. Already, there are signs of cracks in the supply discipline in Maharashtra, Andhrapradesh etc. The prices, on an average, fell by 5.55% as reflected by the fall in Whole Sale Price Index of Cement which fell to 146.3 as of week ended 9th February 2002 from 154.9 as of week ended 10th February 2001.
Impact of the budget on the industry’s prospects
The cement industry is likely to be substantially benefited by accelerated progress of the golden quadrilateral and the North South and East West corridor projects. The housing projects for the defence personal will also lead to incremental demand.
The white cement industry’s margins will zoom as the excise duty has been virtually halved. Alternatively, if the industry passes on a part of the benefit to the customer, the possibility of increase in demand will further bolster the operating margins of the white cement manufacturers.
The reduction in the diesel cost by Rs 0.50 per litre will benefit the cement industry in reducing the operating costs and also the transport costs. Likewise, the reduction in diesel cost may also lead to marginal fall in the road freight rates for the cement industry. Considering the fact that about 65-70% of the cement is being transported by Road, this may lead to marginal benefit for the industry.
The reduction in import duty on limestone is not likely to bring significant benefit to the industry, as the players have captive limestone quarries for their requirements.
The railway budget reduced the freight on cement, benefiting the industry. Nevertheless, this benefit was partially offset on account of increase in freight rates on coal, limestone etc. Though only about 30-35% of the cement is transported through railways, the fall in railway freights is also likely to get reflected in the fall in freight rates on road. On a net basis, the Industry will benefit from the fall in rail / road freight rates.
The reduction in customs duty on cement / clinker from 25% is likely to cap the pricing power of the industry. Nevertheless, large scale import of cement / clinker is not likely, despite low international cement prices. The various infrastructure bottlenecks, the surge in transport costs and the problems of bulk handling will arrest possibility of large-scale imports.
Company Impact
Cement companies in general, and companies like ACC, Guajrat Ambuja and India Cements are likely to benefit more from reduction in fuel and freight costs. Grasim Industries and J K Industries will benefit on account of 50% reduction in excise duty. Larsen & Toubro will benefit from increased thrust on infrastructure, as it is also into EPC business.
As savings on dividend tax will be substantial than incremental tax due to surcharge, especially for high dividend payout companies like Gujarat Ambuja and ACC, the changes in direct taxes will be positive for the industry.
Companies to watch
Gujarat Ambuja Cement, Larsen & Toubro, Grasim ACC are likely to be positively impacted.
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