The Indian cement industry with a total capacity of about 165 m tonnes in FY07 is the second largest market after China. Although consolidation has taken place in the industry with the top five players controlling almost 50% of the capacity, the balance capacity still remains pretty fragmented.

Despite the fact that the industry has clocked a production of more than 100 m tonnes for the last four consecutive years, the per capita consumption of around 125 kgs compares poorly with the world average of over 260 kgs and more than 450 kgs in China. This, more than anything underlines the tremendous scope for growth in the industry in the long term.

Industry wish list

Cement Manufacturers Association of India

• To rationalise the tax rate. Cement is the highest taxed essential infrastructure input in India. Various taxes and levies put together constitute 60% or more of the ex factory price.
• VAT on cement and clinker should be brought in line with similar construction material like steel to 4%. This would help in reducing cement prices by Rs 20 per bag.
• An abatement of 55% on the excise duty levied on MRP as per NCAER report. Wherever excise duty is levied on the basis of MRP abatement is given. This would restrict hike in prices.
• To abolish import duty on coal and pet coke. At present 5% import duty is charged on coal and pet coke. 
• Countervailing duty (CVD) be re-imposed on import of cement to provide level playing field for the domestic manufacturers. To bring down the scaling prices of cement customs duty was brought down to zero and withdrew CVD on imported cement.   

Budget over the years

Budget 2005-06

• Customs duty on pet coke reduced from 20% to 10%
• Excise duty on clinker increased to Rs 350 per tonne from Rs 250 per tonne.
• Customs duty on cement reduced from 20% to 15% in line with the reduction in peak customs duty rate.
• Deduction of upto Rs 1 lakh on the repayment of principal amount of housing loan.

Budget 2006-07

• Customs duty on cement reduced from 15% to 12.5% in line with the reduction in peak customs duty.

Budget 2007-08

• Differential excise duties to be levied on cement. A retail price of less than Rs 190 per bag will attract an excise duty of Rs 350 per tonne, retail price ranging between Rs 190 to 250 will attract an excise duty of 12%, while the same will be jacked up to Rs 600, if the retail price exceeds Rs 250 per bag.
• Freight rates on cement remained unchanged but a discount of 40% on incremental bag loading has been recommended.
• With a view to reduce the cost of manufacturing and encouraging infrastructure development, the customs duty on Portland cements has been reduced from 12.5% cent to nil.
• Dividend distribution tax to be hiked from 12.5% to 15%.
• Duty on coking coal fully exempted.

Key positives

Infrastructure spending: The ongoing road construction project, airport privatisation and river linking projects are fundamental long-term growth drivers for the industry. The Golden Quadrilateral project is already in its final leg, albeit delayed. Accelerated spending in infrastructure is likely to mute the cyclicality aspect of the cement business.

Housing demand support: Cement demand has also remained healthy on account of strong support from the housing sector. Considering the steep shortfall in dwelling units in the country, prospects for the sector are promising.

Demand-supply dynamics: Unlike the last decade, the oversupply situation in the cement sector has reduced, thus bringing along with it some degree of pricing power. So, the operating profit growth has been faster than the topline growth and the scenario is likely to continue in till the announced capacities come on stream. The same is expected to happen starting middle of the year 2008 onwards, the bulk of which will come onstream from CY09 onwards.

Consolidation trigger: The industry is a lot more consolidated now than it ever was in the past. Top five players account for almost 50% of capacity. Fragmentation reduces pricing power and consolidated operations improve efficiency apart from providing pricing power.

Key negatives

Slow progress of reforms: Infrastructure spending, in the recent past has been largely restricted to the government. The private sector has not been provided with adequate impetus, which impacts the overall growth of the economy. Liberalising FDI in the public infrastructure sector could provide a big fillip. But this has been slow to come by.

Spiralling input costs: Cement is a commodity business and any company's ability to maintain margins is dependent on factors like access to coal and stable transportation cost apart from favourable pricing environment. The rise in input costs like coal prices and hike in petroleum product prices could pressurise margins.

Rise in interest rates: The impact of high interest rates on housing demand will play a crucial role on the future prospects of the sector. The importance of the housing sector in cement demand can be gauged from the fact that it consumes almost 70% of the country's cement production. If this support wanes, it could tilt the odds against the cement manufacturers.

Huge capex: Recently, cement demand has surpassed supply, resulting in higher prices across the country. On account of favourable pricing scenario and growing demand for the commodity, almost all the players have lined up capacity expansion plans. However, this scenario is likely to change once the planned capacities come onstream. The announced capacities are expected to be operational by the end of calendar year 2008 leading to a situation of excess supply and in effect, driving down the current high realisations.