Continue with the thrust on housing and highlight

Current industry status:

Cement production of large plants grew by 9.59% to 91.15 million tonne in the ten months ended Jan'03, while dispatches grew by 9.32% to 91.00 million tonne during this period. The industry continues to witness good growth in demand fuelled by increased housing construction and improved demand from Highway and roadway projects.

Nevertheless, the industry has seen fall in realisations during the current year, over the previous year, except for a brief period in Nov'02. As a result, while the industry witnesses good growth in dispatches, the margins have been under pressure. Further, the over supply situation in the industry continues unabated, though there are hopes that the same will be corrected in due course. This is evident from the fact that the gross capacity additions in Apr-Dec'02 was only 3.2 million tonne as against 12.83 million tonne in the corresponding previous year period.

However, Sanghi Industries' 2.6 million tonne unit in Gujarat is likely to be commissioned in the current fiscal, putting further pressure on cement prices, particularly in the western region. The Southern Region appears to be an exception, with sustained and impressive rise in demand on the one hand, and improvement in realisations since Jan'03.

Prevailing tax rates and provisions

Industry expectations:

Continuation of specific rate of excise duty on (grey) cement

Currently the excise duty is @ Rs 350 per tonne for large plants and Rs 200 per tonne for mini cement plants. The cement manufacturers association (CMA) has proposed the continuation of the existing specific rate of excise duty on cement.

Reduce Royalty on Limestone 

The mining royalty on limestone was increased in Sept'00 by 25% to Rs 40 per tonne. Normally 1.5 tonne of limestone is required to manufacture 1 tonne of clinker, thereby the impact is around Rs 60 per tonne of cement. The CMA has proposed the roll back of the royalty on limestone to Rs 32 per tonne.

Reduce Customs duty on non-coking coal

Currently, the basic customs duty on non-coking coal is 20% while on coking coal it is 5%. The CMA demands reduction in the basic import duty on coking coal to 5%, in line with that charged on coking coal.

Greater thrust on housing sector

The CMA has demanded that the Urban Land Ceiling (Regulation) Act be repealed in the remaining states, and remove the restriction on land availability. This will enable increased supply of land for construction. Further the association has also demanded that the Urban infrastructure industry be accorded industry status to enable greater inflow of funds at relatively cheaper rates to this priority sector.

Encourage Exports

Cement exports were marginally up by 3.4% to 2.76 million tonne in the ten months ended Jan'02, while clinker exports during this period zoomed by 93% to 2.66 million tonne.

The association has proposed a 50% railway freight concession for export of cement / clinker. Further, it has requested the Government to negotiate with the Government of Srilanka and Bangladesh for zero % duty on cement / clinker imports from India.

Market/Analyst expectations:

The specific rate of excise duty is likely to continue, but the possibility rollback of royalty on limestone appears remote. Greater thrust on housing construction and highway and road way projects are likely in the budget, which will spur and sustain demand growth for cement.

But it is likely that interest on housing loan for personal purposes may be reduced from Rs 1.5 lakh, which may impact the demand for housing. Nevertheless, the interest expenditure on most housing loans is less than Rs 1.5 lakh, and hence the real negative impact, is likely to be negligible.

The railway budget may increase the freight rates, which will impact margins of the cement industry, which spends heavily on inward and outward freight charges.

Best Pre-budget Buys/Sells:

Large players with greater exposure to South like ACC, Madras Cements are likely to be benefited more. However, Gujarat is currently witnessing contraction in demand, and the pricing pressure may further intensify on commissioning of Sanghi plant. Hence, Gujrat Ambuja and L&T may not benefit much.

Grasim Industries is a good pick in view of improving margins from the cement business, coupled with improving fundamentals of its VSF and sponge iron business. However, clearance of its open offer for L&T at a reasonable price is crucial.

Summary:

The cement industry is witnessing improved demand, fuelled by sustained growth in housing construction and the momentum in highway and roadway projects.

The government is likely to place increased thrust on these segments to spur economic growth. So, the demand side is likely to become all the more better.

But the realisations are not likely to improve dramatically, unless the producers ensure discipline in supplies.

Nevertheless, improved cost effectiveness, increasing contribution of blended cements and increased dispatches will partly offset the softening of cement prices, and the leading players, especially those in South or with significant presence in south are likely to be more benefited.

The long term fundamentals of the industry remains good, and is set to improve as the fresh capacity additions have significantly come down, while the demand is growing at robust pace, thereby leading to faster cementing of the demand supply gap.

Run-up to the Budget 2003

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