Cement sector: Can the Budget boost it?

Possible reduction in excise duty on cement from the current levels of Rs 400 per tonne to Rs 350 a tonne (CII)

Reduction in custom duty on cement inputs like coal and pet coke (CII)

Maintain the tax incentives being provided on housing loans

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.

The Finance Minister has proposed to extend such a measure to other infrastructure sectors. The IIG includes the like of IDBI, IDFC, ICICI Bank, SBI, LIC, Bank of Baroda and Punjab National Bank. The consortium will pool their resources to an extent of Rs 400 bn. Initially, airports, seaports and tourism will be the target sectors of the IIG.

The FM has also emphasized a great deal on completion of various irrigation projects and the development of a multinational standard port in Kochi.

Additional 2% education cess on all direct and indirect tax.

Infrastructure spending - The ongoing road construction project, the proposed airport privatization and river linking projects are fundamental long-term

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.

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 Lafarge 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.

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.