WEB EXCLUSIVE: Budget impact on cement sector

Budget proposals are a mixed bag for the sector that is already reeling under margin pressures.

Cement sector has been reeling under the pressure rising raw material costs and lower realizations. The growth in demand on year-on-on year basis has also not been encouraging. Overall production and dispatches during January 2011 had risen marginally – by 1.7 per cent and 0.3 per cent, respectively as compared to the previous corresponding period (As per Anand-rathi reports).

The Union Budget proposals announced today have not provided much relief for the sector. Though the Finance Minister announced a cut in customs duty on Pet coke and Gypsum by 2.5 per cent each, there are not many manufacturers using pet coal. Analysts say that some benefits though may accrue to Shree Cement, which is major pet coke importer, besides Jaypee Cement and JK Lakshmi Cement, who also import some quantity of pet coke.

However, on the flip side, the price hikes announced today by Coal India, the major supplier of coal in India would be more detrimental for cement majors. Coal India though has not given details on the quantum of hike. The imported coal contract costs continue to be firm, reeling above $228 a tonne. These hikes will increase input costs for cement majors, pulling down their margins. Looking at the sluggish demand, it will not be easy for the manufacturers to pass on the hike in input costs.

Gypsum (used in the manufacture of cement) also has seen 2.5 per cent reduction in custom duty. However, Vineet Hetamsaria, Vice-President (Research), Pinc added that gypsum is used in small quantities, and hence, the benefit of the cut in duty will be limited.

The Union Budget also proposed replacement of excise duty with ad-valorem duty for cement. Analysts reckon that for cement bags priced up to Rs 190 a bag, manufacturers will have to pay revised duty of 10 per cent of the price, plus additional duty of Rs 80 a tonne. On the other hand, for bags priced more than Rs 190 a tonne the additional duty would be at Rs 160 a tonne apart from duty of 10 per cent of the price. Most analysts maintain that this would lead to additional burden on cement players.

All major stocks in the sector lost 2.2 – 4.92 per cent on the Bombay Stock Exchange (BSE) today with exception of Shree Cement, which closed 1.31 per cent up on Monday.