Cement needs sops for housing, roads

BS Bureau

India is the second largest cement producer in the world but the market is extremely fragmented with more than 50 plants accounting for the 119 million tonnes per annum capacity. The industry's growth is linked to economic growth and has historically been in the region of 7-8 per cent.

A lower consumption base in 1998-99, coupled with sops to housing and cement-intensive infrastructure industries, resulted in the industry's growth climbing to over 15 per cent in 1999-00. There was, however, a decline of 1.9 per cent during 2000-01 because of an overall slowdown, extensive drought, uneven and excessive monsoon and an earthquake in Gujarat.

Consumption, however, appears to have improved, with the first eight months of 2001-02 witnessing a growth of 5.9 per cent. Road projects, reconstruction in Gujarat and growing housing demand are the prime drivers of the demand growth in the medium term.

Consolidation in the industry has improved understanding among cement producers. As a result, they now have a greater say in the pricing of the product.

Key Issues: The Indian cement market has over 20 per cent excess capacity and external costs -- freight and energy, which account for the bulk of the manufacturing costs -- are rising.

Because of these two factors, margins of cement companies have been under pressure over the past few years, thereby impacting their enterprise value. This coupled with good long-term consumption growth prospects -- India has a much lower per capita cement consumption of 100 kg relative to the world average of 260 kg -- has prompted many international cement companies to enter the market by acquiring local companies.

The improvement in price realisation since December 2000, largely on account of the producers' attempt to regulate supplies, coupled with a focus on cost control and operational efficiency, has had a positive impact on the bottomline of the cement companies during 2000-01 and the first half of 2001-02.

The threat from imports is limited because of high import duties, poor infrastructure at ports, oversupply in the domestic market and sales in "bags", as opposed to bulk sales overseas.

Factors that can be addressed in the Budget: In line with earlier budgets, providing further tax sops to the infrastructure sector, such as a reduction in the service tax and corporate tax on construction companies, and increased tax sops to cement-intensive industries like roads and housing could increase the demand for cement. This would improve the demand-supply position and would eventually result in firmer price realisation by the players.

Concessions on external cost elements such as railway freight on coal and cement, diesel prices and Customs duty on imported coal would lower the manufacturing costs of cement companies and improve their margins.

Cement attracts a specific excise duty of Rs 350 per million tonnes. If reduced, this could improve the margins of players if they do not pass on the benefit to consumers. The user industry will still stand to gain if some of the benefit is passed on to consumers.

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