Crisil Suggests Abnormal & #39;Optimal & #39; Rates

Credit rating agency Crisil, which was engaged by the Cement Manufacturers Association to recommend an optimal price situation for the sector, has suggested abnormally high prices which are far above the current ruling prices at present.

For instance, Crisil has recommended, in Mumbai, the "fair" ex-stockist cement price from a new plant should be around Rs 216-220 per bag and from an existing plant around Rs 180-193.

Retail prices would be higher by Rs 4-10 per 50 kg bag besides a further Rs 5-7 per bag for cement available in paper bags. These prices are far higher than the ruling price of Rs 167 per bag in the Mumbai market.

Analysts feel the Crisil report will give cement companies yet another excuse to further revise prices, though any revision may not happen till the monsoon is over. Crisil has divided the market into 12 clusters and 22 key markets.

T M M Nambiar, CMA president said, " The consumers are rightly concerned about cement being available at a fair price. At the same time, large investors are concerned about the viability of their investment which depend on the fair price of cement."

Unless the investment in cement industry is viable, requisite allocation of funds by financial institutions and large investors may not be forthcoming, he added.

On being questioned on price regulation strategy by cement manufacturers, Nambiar said production cuts are a normal phenomenon and have nothing to do with the price regime. "Demand needs to be matched adequately and there is no point in producing what cannot be absorbed by consumers," Nambiar said.

According to AL Kapur, whole-time director at Gujarat Ambuja, "The industry can expect a 8 per cent growth considering the recent initiatives taken by the central as well as the state government. The upcoming highway projects and the latest housing incentives will prove to be a major boost to the industry."

Some of the key markets identified by Crisil where prices should be far higher than ruling prices are: Mumbai, Ahmedabad, Hyderabad, Bangalore Chennai, Thiruvananthapuram, Patne, Kolkata, Guwahati, Bhubaneshwar, Bhopal, Lucknow, Delhi, Jaipur and Raipur.

Crisil has used the `capital asset pricing model' to conduct the study. For each cluster ascertained, the average operating cost of producing cement have been estimated to which capital related charges like depreciation interest and return on equity have been added to arrive at the cost of production for the cluster.