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Cement: Housing push

May 27, 2002

Cement, one of the key infrastructure industries, recorded a good growth in FY02. Domestic demand grew by 9.5%, according to Cement Manufacturers Association (CMA). This translates to a figure of 102 m tonnes. This growth is mainly attributed to the Government spending to develop infrastructure like roads and housing. Though it was the spending on NHDP (National Highway Development Program) that spurred the growth in FY02, it is housing that traditionally has been the growth driver. We look at the prospects of the housing sector driving future growth.

Historically, housing has accounted for nearly 60% of domestic demand and there has always been a conscious effort by the government to promote the housing industry. However, in the past two years there, attention given has improved. The budgets in the recent past proposed to make available a 20 percent rebate under section 88 of the Income-tax Act for repayment of housing loans up to Rs 20,000 per year as against Rs 10,000 earlier. The government has also enhanced the deduction of interest paid on borrowings to Rs 150, 000.

In the budget for the fiscal 2002-03, various schemes like the Indira Awas Yojana were announced. The government has announced a package of Rs 15 bn for the scheme. According to which, about 1 m rural houses are to be constructed. Also, the co-operative sector has been instructed to help construct 150,00 rural houses and the National Housing Board will help finance another 1 m houses. Other measures taken to improve the demand include a 20% increase in the housing related credit flow to the agricultural sector.

While the steps taken are a big push for the cement industry, the real good news comes from the fact that the demand for the Rs 94 bn (US$ 2 bn) housing industry is far greater than the supply. In FY02, the demand stood at nearly 4.5 m units, while the supply was only 3.5 m units.

HDFC ICICI SBI LIC Housing Corporation Bank
Fixed rate* 10.0-11.0% 11.0-12.0% 12.0-12.5% 10.0-12.0% 10.5-11.5%
Floating rate* 11.0% 10.5-11.0% 11.5% 11.0% 11.0%
*For varying time periods and amounts

Another encouraging trend has been the reduction in the interest rates on housing loans. These interest rates have fallen by nearly 5 percent in the last 5 - 6 years. These rate cuts have prompted a greater number of people to go in for housing loans. Decreasing property prices have also contributed to the increase in demand. The sector has grown 30% on an average in the past years and is expected to maintain this growth rate in the coming years.

Last year highway projects have been largely responsible growth in the industry, but the housing sector seems all set prop up growth rates going forward. The question is will this reflect in the topline as overcapacity in the industry has lead to low cement prices. Stiff competition in the future is likely to take a toll on margins.

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