Cement: Pre-budget sector analysis

The cement sector grew at a CAGR of 8.0% between FY99-FY03. However, in FY04, the sector grew at a slower rate of 5.5%. Though infrastructure development and robust housing growth are a positive, are fundamentals strong enough to support growth in the long-term? Read more

Industry Wish List

	As per the Cement Manufacturers Association, " The Indian cement industry, which is faced with one of the highest excise duty incidence among domestic product categories, also pays the highest tax as compared to its counterparts worldwide. Therefore, reduction in excise duty on cement from the current level of Rs 400 per tonne is required.
	As per CII, "The specific excise duty on cement and cement clinker were both increased in Budget 2003-04 to Rs. 400 per ton. Cement being a basic good, crucial for construction and for generating employment, the government should bring the specific duty down to Rs. 350 per ton."
	Speedy implementation of infrastructure related projects. Further liberalisation of private sector participation in the infrastructure sector.

Budget over the years

Budget 2001-02	Budget 2002-03	Budget 2003-04

Speedy implementation of infrastructure related projects. Further liberalisation of private sector participation in the infrastructure sector. Cement purchased for Gujarat relief work to be exempt from Excise duty. The dividend tax has been reduced to 10% from 20%. Reduction of surcharge on corporate tax	Customs duty on cement and cement clinker reduced to 20% from 25%. More funds allocated to the rural roads projects. Railway freight rates for cement reduced by 0.96%. Railway freight rates for coal increased by 0.83%. The cement manufacturing companies can avail of a higher rate of depreciation of up to 40% on capital goods if they increase their capacity by 25%.	Excise duty on cement hiked by Rs 50 to Rs 400 per tonne. Major announcements on the infrastructure side including roadways, airports and convention centres. Tax breaks on specified housing projects have been extended till 2005.

Key Positives

	Infrastructure spending - The ongoing road construction project, the proposed airport privatization 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 remained healthy also 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. This is also helped by the low interest rate regime.
	Demand-supply dynamics - Unlike the last decade, the oversupply situation in the cement sector is likely to reduce thus bringing along with it some extent of pricing power. So, the operating profit growth is likely to be faster than the topline growth in the long-term.
	Consolidation trigger - The industry is lot more consolidated now that it was ever in the past. It is estimated that the top five players account for almost 60% of capacity. Fragmentation reduces pricing power and consolidated operations improve efficiency apart from providing pricing power.
	Other positives - Among other positive factors for the Indian software industry, the major ones are - large availability of talented manpower, cost advantage and geographical advantages (time-zone advantages).

Key Negatives

	Slow progress of reforms - Infrastructure spending, in the recent past, has been largely restricted to the government. The private sector has not been provided adequate impetus, which impacts the overall growth of the economy. Liberalizing FDI in the public infrastructure sector could provide a big fillip. But this has been slow to come by.
	Entry of new players - Global majors like Cemex and Holcim are eyeing emerging markets (including India) for growth. Though smaller players could close down operations, entry of new players could restrict the pricing power. Fragmentation could increase. Lafarge is already one of the top six players in the country.
	Susceptibility to coal and oil prices - Cement is a commodity business and any company's ability to maintain margins is dependent on the pricing environment apart from factors like access to coal and stable transportation cost. The rise in coal prices and hike in petroleum product prices could pressurise margins.

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