Increased outflow towards infrastructural built up and rural housing has sustained demand for cement during FY10. On account of these initiatives, the industry has grown at the rate of 10% and is likely to sustain the momentum going forward. Thus, volumes growth is likely to remain strong. However, prices are likely to come under pressure. To cater to the increasing demand for the commodity, the industry has lined up capacity expansion plans either through the brownfield or greenfield expansion route. Union Budget 2010 has doled out mixed measures for the cement sector. On one hand it is focusing on sales pick up with growth in volumes, while on the other hand directly and indirectly hiked the operational costs. However, considering the demand push, these negatives are less likely to have any material impact on the sector.
Budget Measures
A slew of incentives have been doled out for end users of cement such as the housing sector and development of infrastructure.
Excise duty has been hiked from 8% to 10% on ad valorem basis and specific rates of duty on cement and clinker has also been raised upwards proportionately:
- Excise duty on bulk cement 10% or Rs 290 per tonne whichever is higher from 8% or Rs 230 per bag whichever is higher.
- In case of packaged cement, retail price per 50 kg bag exceeding Rs 190 per tonne would entail excise duty of 10% of retail sale price. In case of retail price per 50 kg bag not exceeding Rs 190 per tonne is increased to Rs 290 per tonne from Rs 230 per tonne.
- Excise duty on clinker up from Rs 300 per tonne to Rs 375 per tonne.
Clean energy cess on coal produced in India at nominal rate of Rs 50 per tonne to be levied and cess will also apply on imported coal.
Restoration of duties on petroleum based products likely to result in increase in freight costs.
Surcharge on domestic companies reduced to 7.5% from 10%.
Increase in the rate of Minimum Alternate Tax from 15% to 18% of book profits.
Budget Impact
Increased budgetary allocation towards infrastructural development and housing is likely to boost demand for cement. Thus, cement manufacturers will continue to benefit owing to increase in volumes.
Impact of cess on coal and rollback of duties on petroleum products would indirectly affect cement manufacturers with increase in freight and cement production cost (power costs). Increase cost of manufacturing and higher excise is less likely to hurt earnings of cement manufacturers as these costs are pass-through.
Considering the volume push owing to increase in construction activity the adverse effect of these measures would be limited.
Company Impact
With more incentives being spelled out for the infrastructure and housing sector, cement manufacturers will continue to benefit. This is beneficial to all cement companies, specifically the top layers catering to eastern region such as ACC and Ultratech Cement.
Increased outflow towards infrastructural built up and rural housing has sustained demand for cement during FY10. On account of these initiatives, the industry has grown at the rate of 10% and is likely to sustain the momentum going forward. Thus, volumes growth is likely to remain strong. However, prices are likely to come under pressure. To cater to the increasing demand for the commodity, the industry has lined up capacity expansion plans either through the brownfield or greenfield expansion route. Union Budget 2010 has doled out mixed measures for the cement sector. On one hand it is focusing on sales pick up with growth in volumes, while on the other hand directly and indirectly hiked the operational costs. However, considering the demand push, these negatives are less likely to have any material impact on the sector.