Budget 2005-06: Cement
The cement sector grew at a CAGR of 8.0 per cent between FY99-FY03. However, in FY04, the sector grew at a slower rate of 5.5 per cent. Though infrastructure development and robust housing growth are a positive, are fundamentals strong enough to support growth in the long-term?
|
|
Continued thrust on infrastructure. Under NHDP-III, around 4,000 kms of four-lane highways to be completed by FY06. |
|
|
Exemption of interest on housing loans continues |
|
|
Duty on cement clinkers to be increased from Rs 250/MT to Rs 350/MT. |
|
|
Infrastructure related initiatives and maintaining the exemption available on interest on housing loans would continue to aid the demand for cement. |
|
|
The increase in duty on cement clinkers would affect the profitability of cement players in the near-term. However, considering the demand-supply dynamics of the industry in the medium-term, the same could be passed onto the consumers. |
|
|
There has been no major announcement pertaining to the cement sector in this budget. However, the continued thrust provided to infrastructure related measures viz. roads, ports, etc, would continue to aid the growth of the sector in the medium to long-term. We expect cement demand to grow at 8 per cent to 9 per cent over the long-term. Also, in the medium-term, since the demand-supply gap is narrowing, the pricing environment will be more favorable for cement manufacturers. |
|
|
Possible reduction in excise duty on cement from the current levels of Rs 400 per tonne to Rs 350 a tonne (CII) |
|
|
|
Reduction in custom duty on cement inputs like coal and pet coke (CII) |
|
|
|
Maintain the tax incentives being provided on housing loans |
| Budget 2002-03 |
|
Budget 2003-04 |
|
Budget 2004-05 |
|
|
|
|
|
|
Customs duty on cement and cement clinker reduced to 20 per cent from 25 per cent.
More funds allocated to the rural roads projects.
Railway freight rates for cement reduced by 0.96 per cent. Railway freight rates for coal increased by 0.83 per cent.
The cement manufacturing companies can avail of a higher rate of depreciation of up to 40 per cent on capital goods if they increase their capacity by 25 per cent. |
|
Excise duty on cement hiked by Rs 50 to Rs 400 per tonne.
Major announcements on the infrastructure side including roadways, airports and convention centres.
Tax breaks on specified housing projects have been extended till 2005. |
|
The Finance Minister has proposed to extend such a measure to other infrastructure sectors. The IIG includes the like of IDBI, IDFC, ICICI Bank, SBI, LIC, Bank of Baroda and Punjab National Bank. The consortium will pool their resources to an extent of Rs 40,000 crore (Rs 400 billion). Initially, airports, seaports and tourism will be the target sectors of the IIG.
The FM has also emphasized a great deal on completion of various irrigation projects and the development of a multinational standard port in Kochi.
Additional 2 per cent education cess on all direct and indirect tax. |
|
|
|
|
|
|
| Key Positives |
|
|
|
Infrastructure spending - The ongoing road construction project, the proposed airport privatization 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 remained healthy also 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. This is also helped by the low interest rate regime.
|
|
|
Demand-supply dynamics - Unlike the last decade, the oversupply situation in the cement sector is likely to reduce thus bringing along with it some extent of pricing power. So, the operating profit growth is likely to be faster than the topline growth in the long-term.
|
|
|
Consolidation trigger - The industry is lot more consolidated now that it was ever in the past. It is estimated that the top five players account for almost 60% 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 adequate impetus, which impacts the overall growth of the economy. Liberalizing FDI in the public infrastructure sector could provide a big fillip. But this has been slow to come by.
|
|
|
Entry of new players - Global majors like Cemex and Lafarge are eyeing emerging markets (including India) for growth. Though smaller players could close down operations, entry of new players could restrict the pricing power. Fragmentation could increase.
|
|
|
Susceptibility to coal and oil prices - Cement is a commodity business and any company's ability to maintain margins is dependent on the pricing environment apart from factors like access to coal and stable transportation cost. The rise in coal prices and hike in petroleum product prices could pressurise margins. | |
Equitymaster.com is one of India's premier finance portals. The web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.
More from rediff