GACL recovers

Gujarat Ambuja Cements recovered smartly on Monday on the back of a sharp rise in its dispatches in Feb 2003.

The scrip of the leading cement maker in Western India was up by 1.4% at Rs 163.45 on the BSE by the first half of the session. Earlier, it hit a high of Rs 164.50. Volumes on the counter were modest, with 16,000 shares changing hands.

Last Friday, the Gujarat Ambuja Cements stock was volatile, ending in the red after an early rally. The volatility on the counter was after the Union Budget for 2003-04 (which was presented on that day) proved to be a mixed bag for the cement sector. While on the one hand, there was a strong thrust on infrastructure like new road and airport projects in the Budget, simultaneously there was a hike in excise duty on cement and clinker by Rs 50 per bag to Rs 400 and Rs 250 respectively. The GACL scrip shed 0.8% on that day to settle at Rs 161.15.

The battered GACL stock has staged a recovery on the bourses of late. From a low of Rs 153.65 on 20 February 2003, it has surged 6.37% in the last few sessions to the current Rs 163.45.

GACL today announced a 44% jump in its cement dispatches for February 2003 to 871,000 tonnes. Cement production rose by 36% to 856,000 tonnes. The company has been recording a sharp rise in dispatches, thanks to capacity expansion of 2 million tonnes that it carried out some time back at its Chandrapur plant in Maharashtra. For January 2003, GACL's dispatches had risen by 23.8% to 847,000 tonnes.

The rise in GACL's dispatches in February 2003 may be due to the practice of most cement majors to dump their produce in the market in the months of February and March every year to boost year-end sales.

The rise in capacity expansion carried out over the last couple of years by most of the cement majors has once again created a situation of supply overhang, thereby dampening cement prices. Cement demand has been robust, but its prices have been under pressure. In the current financial year ending 31 March 2003, cement demand is expected to increase by a healthy 9.5%. Demand growth is expected to be the highest in the South (about 15%), followed by the North (9%), the West (6%) and the East (4%). Demand continues to be driven by the Golden Quadrilateral road project and the sustained growth in housing construction activity.

The positive developments for the cement sector in the Budget are the cut in Central Sales Tax from 4% to 2% and a thrust on infrastructure. On the other hand, there is also a hike in excise duty by Rs 50 per bag. The excise duty on cement has been hiked by Rs 50 per tonne to Rs 400 and by an equal Rs 50 per tonne on clinker to Rs 250 per tonne. The estimated additional burden on the industry due to the latest excise hike is about Rs 240 crore (Rs 2.4 billion). However, cement analysts feel the reduction in CST will benefit the sector. In fact, this move has the potential to almost negate the adverse impact of the increase in specific excise duty, they said.

The thrust on infrastructure in the Budget may boost cement demand further. The Centre has announced 48 new road projects at an estimated cost of Rs 40,000 crore (Rs 400 billion), of which 25% of the roads will be made of concrete. Other initiatives include renovation and modernisation of two airports and two sea ports at an estimated cost of Rs 11,000 crore (Rs 110 billion), and establishment of two global standard international convention centres at an estimated cost of Rs 1,000 crore (Rs 10 billion). It is also proposed in the Budget that funds to the extent of Rs 8,000 crore (Rs 80 billion) for the Golden Quadrilateral should be arranged through a special purpose vehicle of the Ministry of Railways. While Rs 3,000 crore (Rs 30 billion) thereof will be equity provided by the Centre, the balance Rs 5,000 crore (Rs 50 billion) will be loans from the market. The repayment of debt will be done by earmarking railway receipts over the period of amortisation. This will ensure greater certainty to inflows from such projects, enhancing the ability to raise funds for such projects at relatively finer rates.

BSE code: 500425