Post Budget Analysis - Cement Sector

Cement sector one of the major contributors to the overall development of the infrastructure sector has got positive outcome from the Budget 2012-13. The industry has been struggling from the high input costs especially on account of coal prices. Almost 50-55% of the coal requirement is met through import due to short supply in the country and more priority given to the power sector. Non Coking coal attracts 55 custom duties.

Further higher excise duty on cement resulting from Ad valorem rate+ a composite rate related to the MRP of the product has impacted the margins of the cement companies. Details of the duty are mentioned in the table below.

Excise duty and custom duty structure table

• The excise duty structure on cement manufactured has been rationalized. The Excise duty will be charged on ad valorem basis of 10% + Rs 120 on per tonne. The graded RSP slabs for the purpose of charging of duty on cement manufactured are being done away with. Moreover Cement is also being notified under section 4A, that is, retail sale price (RSP) based assessment with an abatement of 30% from RSP.

• The change in the duty structure on the packaged cement sales with a proposed abatement of 30% on the Retail prices will benefit the cement companies on the overall cost. In the table mentioned below we have calculated the total outgo before and after the rate change.  The cement companies with the new rate structure will benefit by Rs 60 on per tonne and by Rs 3 on per 50Kg bag.

Net Impact of the new tax structure

• Moreover as expected the custom duty on non coking coal has been reduced from 5% to Nil. The custom duty on the non coking coal will provide relief to the industry from the high coal cost which will further result into some ease on the Margin front in the coming year.

Boosting infrastructure spending in the country will results into higher demand for cement

Cement industry derives its growth from the infrastructural development and the industry always looks forward to a higher budgetary allocation for the infrastructure sector growth.  This year the government has announced certain major plans to increase the spending on construction and infrastructure. The major one is the tax free bonds for financing infrastructure projects which has been doubled to Rs 60000 crore in FY13. This should aid the cement industry to report better growth in terms of demand.

Higher allocation for the Road transport to Rs 25360 crore, up by 14 percent targeting a length of 8800 Km road under National Highway development program will also help to create additional demand in the coming year.

In conclusion we believe the overall budget for cement industry has come somewhat in line with the industry expectation which is positive. The custom duty cut, better excise duty structure with an abatement of 30% and higher infrastructure funding seems to be in favour of the industry. This has been reflected in the stock price movement in some of the cement companies mentioned below. However the recent freight hike by railway has increased the freight cost of the cement companies which could result into dampener if demand does not sustain in the coming months.

Stock price movement of few cement companies.