The Hindu Business Line : Cement: An excise load

THE housing industry will bear the brunt of soaring cement prices, despite the Finance Minister trying to please the tax-payers by continuing with the existing tax rebate of Rs 1,50,000 on housing.

The Finance Minister, has announced an increase in the excise duty on cement from Rs 350 per tonne to Rs 400. This would translate into a hike of Rs 2.50 per kg of cement.

Apart from this, the excise duty on cement clinkers has also been increased from Rs 200 to Rs 250 per tonne, while the duty on cement made by mini-plants has been raised from Rs 200 to Rs 250 per tonne.

The excise duty on cement cleared in bulk has also been hiked from Rs 332 per tonne to Rs 382.

This increase in excise duties in the cement sector has happened after a span of almost seven year

Analysis by S. Vaidya Nathan

For the likes of ACC, Gujarat Ambuja Cements, Larsen & Toubro, Grasim Industries and Madras Cements among others, the budget provides kickers on demand-side. To some extent, the glad tidings on this score would be neutralised by the spike in excise duty.

Be it housing or roads, the two key drivers of demand in the last 24 months, there are adequate incentives thrown in to keep up volume growth. Industry demand has been in the vicinity of 10 per cent during this period. This appears set to continue. The demand side drivers in the budget are:

The continuance of direct tax incentives in the form of deduction for interest at Rs 1.50 per lakh for housing loans is sure to keep demand from this quarter ticking away nicely. Housing loan disbursals have been growing at 30 per cent. Such a trend would throw in good demand from the housing sector for cement companies. The removal of restrictions regarding completion date would also help smoothen matters in this regard.

Incentives for companies/other entities undertaking housing projects by way of tax breaks (income to be exempt from tax till Match 2005 ) is another boost for this sector and likely to spur demand. This may also encourage realty majors such as Mahindra Realty, L&T's housing arm and potential MNC entrants in the wake of FDI relaxation to enlarge their scale of operations.

The possibility of additional incentives for slum upgradation, sewerage system laying and green-field housing projects is also an encouraging factor for the cement industry.

As for the road sector, which has been a significant contributor to demand for cement in the last two years, the emphasis on completing the Golden Quadrilateral should continue to be a good source for demand. In 2001-02, this project consumed close to 6 million tonnes of cement. Demand on a similar scale can be expected this fiscal.

The concrete shape given to financing the East-West and North-South corridor would ensure that there is an equally good replacement for cement demand once the Golden Quadrilateral project is completed in the next year or two. The levy of 50 paise per litre on both diesel and petrol - raising Rs 2,600 crore - may ensure that the new projects have just as smooth a run as the Golden Quadrilateral.

In addition to this new big-ticket project, 48 other smaller road projects with an outlay of Rs 48,000 crore and encompassing 10,000 km are to be taken up in a phased manner over a three-year period. A third of it - around 3,000 km - would be implemented in 2003-04.

If these factors continue to spur demand as they have in the last two years, the demand - supply imbalance could get corrected and prove beneficial for the industry. This is important as in the last two years the good volume growth has not translated into healthy bottomline growth for cement companies due to pricing pressures. Two more years of growth in demand of around 10 per cent per annum could place better pricing power in the hands of cement companies.

But the hike in excise duty by Rs 50 per tonne (an increase of 14 per cent) may lead to some stress on profitability in the near term. Given the pricing pressures, cement companies may not at all times be able to pass on this enhanced excise impost. At Rs 2.5 per 50 kg bag, the quantum may appear small.

But in a market saddled with over-supply and producer difficulty in pushing through and sustaining price hikes, this does somewhat dilute the otherwise positive vibes that the Finance Minister had for the cement industry.

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