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From a differential excise duty levied last year, the budget this year proposed a flat rate Rs 400 per MT bulk cement or 14% ad valorem, whichever is higher and cement clinkers excise duty at Rs 450 per MT.
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A slew of incentives to be doled out for the housing sector particularly in the rural areas. The interest rate on housing loan has been reduced.
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Allocation for NHDP enhanced to almost Rs 13,000 crore in FY09. Special attention being paid to SARDP-NE; programme devised for the North Eastern region, apart from the ongoing completion work on Golden Quadrilateral and East West Corridor.
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Coal regulator to be appointed.
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Parent company allowed to set-off the dividend received from its subsidiary company against dividend distributed by itself.
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The government has increased budgetary allocation for roads under NHDP. This coupled with government's initiatives on the infrastructure and housing sector fronts would continue to remain the key drivers.
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Increased infrastructure spending has been a key focus area over the last five years. One would only expect the execution to be monitored closely. Thus from a near to medium term perspective, till the time capacities come on stream, good times continue to lie ahead for cement manufacturers.
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Appointing a coal regulator is looked upon as a positive move as it will facilitate timely and proper allocation of coal (a key raw material) blocks to the core sectors, cement being one of them.
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The excise duty on bulk cement is proposed at Rs 400 per MT bulk cement or 14% ad valorem, which ever is higher. The impact of hike in excise duty will not be so prominent in medium term on account of pricing power lying with the producers.
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With 14% ad valorem duty, incidence of tax increases. Further, once new capacities come onstream, producers may not be able to pass on the hike and thus might be forced to absorb the impact, which in turn would negatively impact profitability. Cement major such as ACC, Ultratech and Grasim will have to bear the brunt of change in excise duty structure.
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Excise duty on cement clinker ahs been raised by Rs 100 per MT to Rs 450 per MT. The move will impact only those who purchase clinker. However, the major cement manufacturers’, infact most of the cement manufacturers have set up a grinding unit so they don’t have to source clinker. Hence the impact is neutral.
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Cement Manufacturers Association of India (CMA) |
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Customs duty on feedstock such as coke to be reduced further |
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To rationalise the tax rate. Cement is the highest taxed essential infrastructure input in India. Various taxes and levies put together constitute 60% or more of the ex factory price. | |
Customs duty on feedstock such as coke to be reduced further | |
VAT on cement and clinker should be brought in line with similar construction material like steel to 4%. This would help in reducing cement prices by Rs 20 per bag | |
Customs duty on feedstock such as coke to be reduced further | |
An abatement of 55% on the excise duty levied on MRP as per NCAER report. Wherever excise duty is levied on the basis of MRP abatement is given. This would restrict hike in prices. | |
Customs duty on feedstock such as coke to be reduced further | |
To abolish import duty on coal and pet coke. At present 5% import duty is charged on coal and pet coke | |
Countervailing duty (CVD) be re-imposed on import of cement to provide level playing field for the domestic manufacturers. To bring down the scaling prices of cement customs duty was brought down to zero and withdrew CVD on imported cement.
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| Budget 2005-06 |
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Budget 2006-07 |
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Budget 2007-08 |
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Customs duty on pet coke reduced from 20% to 10%
Excise duty on clinker increased to Rs 350 per tonne from Rs 250 per tonne.
Customs duty on cement reduced from 20% to 15% in line with the reduction in peak customs duty rate.
Deduction of upto Rs 1 lakh on the repayment of principal amount of housing loan.
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Customs duty on cement reduced from 15% to 12.5% in line with the reduction in peak customs duty.
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Differential excise duties to be levied on cement. A retail price of less than Rs 190 per bag will attract an excise duty of Rs 350 per tonne, retail price ranging between Rs 190 to 250 will attract an excise duty of 12%, while the same will be jacked up to Rs 600, if the retail price exceeds Rs 250 per bag.
Freight rates on cement remained unchanged but a discount of 40% on incremental bag loading has been recommended.
With a view to reduce the cost of manufacturing and encouraging infrastructure development, the customs duty on Portland cements has been reduced from 12.5% cent to nil.
Dividend distribution tax to be hiked from 12.5% to 15%.
Duty on coking coal fully exempted.
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| [Read more on Budget 2005-06] |
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[Read more on Budget 2006-07] |
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[Read more on Budget 2007-08] |
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| Key Positives |
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| Infrastructure spending: The ongoing road construction project, airport privatisation 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 also remained healthy 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. |
| Demand-supply dynamics: Unlike the last decade, the oversupply situation in the cement sector has reduced, thus bringing along with it some degree of pricing power. So, the operating profit growth has been faster than the topline growth and the scenario is likely to continue in till the announced capacities come on stream. The same is expected to happen starting middle of the year 2008 onwards, the bulk of which will come onstream from CY09 onwards. |
| Consolidation trigger: The industry is a lot more consolidated now than it ever was in the past. Top five players account for almost 50% of capacity. Fragmentation reduces pricing power and consolidated operations improve efficiency apart from providing pricing power.
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| Key Negatives |
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| Slow progress of reforms: Infrastructure spending, in the recent past has been largely restricted to the government. The private sector has not been provided with adequate impetus, which impacts the overall growth of the economy. Liberalising FDI in the public infrastructure sector could provide a big fillip. But this has been slow to come by. |
| Spiralling input costs: Cement is a commodity business and any company's ability to maintain margins is dependent on factors like access to coal and stable transportation cost apart from favourable pricing environment. The rise in input costs like coal prices and hike in petroleum product prices could pressurise margins. |
| Rise in interest rates: The impact of high interest rates on housing demand will play a crucial role on the future prospects of the sector. The importance of the housing sector in cement demand can be gauged from the fact that it consumes almost 70% of the country's cement production. If this support wanes, it could tilt the odds against the cement manufacturers. |
| Huge capex: Recently, cement demand has surpassed supply, resulting in higher prices across the country. On account of favourable pricing scenario and growing demand for the commodity, almost all the players have lined up capacity expansion plans. However, this scenario is likely to change once the planned capacities come onstream. The announced capacities are expected to be operational by the end of calendar year 2008 leading to a situation of excess supply and in effect, driving down the current high realisations.
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