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Cement: Excise surprise - Views on News from Equitymaster
 
 
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  • Mar 10, 2003

    Cement: Excise surprise

    The cement industry has witnessed good times in FY03 as far as the demand scenario in the country is concerned. Healthy demand from the housing and road infrastructure sector has resulted in a sharp increase in volumes. Cement volumes have grown by 10% till the period ending November 2002, compared to same period last year. In the current budget too, the government has announced measures to boost cement demand further.

    While the demand has been healthy, cement prices have been adversely affected due to overcapacity. And the recent budget has added further to the pricing related woes of cement companies. The government has imposed an Rs 50/ tonne hike in excise duty on cement from the current Rs 350/ tonne. This means that the excise hike amounts to Rs 2.50/ 50 kg bag.

    According to the Cement Manufacturers’ Association, the tax burden on cement accounted for nearly 30% of the selling price (assuming a selling price of Rs 2,600/ tonne or Rs 130/ 50 kg bag) pre-budget. The selling price mentioned above excludes local transport and dealer margins. Before the budget hike, excise alone accounted for nearly 13% of the total selling price of cement. Post the budget, the excise duty will account for nearly 15% of the selling price. Till now, consumers have been bearing the excise duty, as the cement manufacturers pass it on to the consumers.

    Company Production FY04E
    (m tonnes)
    Direct hit on the
    bottomline FY04E (Rs m)
    Volumes required annually
    to offset excise duty hike* (m tonnes)
    Volume sales in
    February 2003 (m tonnes)
    L&T 13.9 695 0.3 1.0
    ACC 13.5 675 0.3 1.1
    Grasim 11.3 565 0.2 1.0
    Gujarat Ambuja 9.3 465 0.1 0.9

    * Cement price assumed at Rs 160/ 50 Kg bag.

    If cement companies are unable to pass on the hike in excise duty to the consumers, they will have to bear the burden of the same. The table above shows the burden on each of the 4 largest cement companies in the country. If cement companies are unable to pass on the excise hike to the consumers then L&T and ACC are likely to be the most affected. In case of ACC this effect is even more adverse as the profitability levels for the company are low and the hit on the bottomline is larger. Due to supply overhang and the resultant poor prices cement companies have been trying hard to push volumes in order to make up for falling realisations. Hence there are apprehensions that cement producers may not be able to pass on the hike in excise duty to the customers, as the supply overhang has not lifted.

    We feel that in the long term, these apprehensions may be unfounded. The reason for our optimism is that fact that the industry may have seen to worst as far as the supply is concerned. The robust growth in volumes has ensured that the excess supply has been absorbed to an extent. Going forward, with very few capacity additions in the near future, the mismatch is likely to get corrected sooner than later. Hence, when cement prices do see an upward correction, the excise duty hike will get easily absorbed.

    In the short-term however, there is likely to be an understanding among various cement companies as far as a commensurate hike is concerned. Our interaction with the cement industry indicated that the companies are contemplating on the timing of hiking prices. Already cement producers have affected a price hike of between Rs 3-5/50 kg bag in major markets. Cement producers will have no choice but to pass on the hike to the consumers due to already low cement prices ruling in the country.

    While the government’s stress and initiatives on infrastructure projects is commendable, the hike in excise duty has come as a surprise to many. The move seems to be aimed at cross subsidising the reduction in excise duty for other sectors. In this context, the government needs to take a fresh look at its policies to promote better growth of core sector industries like cement.

     

     

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