The Indian cement industry with a total capacity of about 152 m tonnes (excluding mini plants) in FY05, surpassed developed nations like the US and Japan and has emerged as the second largest market after China. Although consolidation has taken place in the Indian cement industry with the top five players controlling almost 50% of the capacity, the remaining 50% of the capacity remains pretty fragmented.
The per capita consumption of 115 kgs compares poorly with the world average of over 250 kgs and more than 450 kgs in China. This, more than anything, underlines the tremendous scope for growth in the Indian cement industry in the long term.
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Customs duty on cement reduced from 15% to 12.5% in line with the reduction in peak customs duty. |
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The reduction in customs duty on cement would have no impact on the domestic cement sector as strong international cement prices and lack of adequate port facilities would continue to protect domestic cement players. |
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There was no major announcement for the cement sector in the Union Budget 2006-07. Thus, we expect the industry to continue to grow at 8% to 9% in the medium to long term. Government's initiatives on the infrastructure and housing sector fronts would continue to remain the key drivers. With no major capacity expansion in the pipeline in the country, the demand supply equation is expected to continue to remain favourable for cement manufacturers and this will help in the improvement of prices. However, since the level of demand supply mismatch is higher in the southern region, it will take longer to achieve demand supply parity in that region. We expect average cement price to increase by around 5% to 6% per annum at the national level in the medium-term owing to fundamental reasons. |
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Cement Manufacturers Association of India (CMA) |
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Reduce excise duty on cement from the current Rs 408/tonne to Rs 250/tonne |
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Lower royalty on cement grade limestone
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Fully meet coal requirements of the cement industry, reduce import duties on coal/non-coking coal
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Provide incentives for construction of cement roads, continue the housing sector sops, prioritise infrastructure projects such as ports, airports, etc. |
| Budget 2003-04 |
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Budget 2004-05 |
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Budget 2005-06 |
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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. |
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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. |
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Customs duty on pet coke reduced from 20% to 10%
Excise duty on clinker increased to Rs 350 per tonne from Rs 250 per tonne.
Customs duty on cement reduced from 20% to 15% in line with the reduction in peak customs duty rate.
Deduction of upto Rs 1 lakh on the repayment of principal amount of housing loan. |
| [Read more on Budget 2003-04] |
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[Read more on Budget 2004-05] |
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[Read more on Budget 2005-06] |
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| Key Positives |
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Infrastructure spending - The ongoing road construction project, airport privatization and river linking projects are fundamental long-term growth drivers for the industry. The Golden Quadrilateral project is already in its final leg, albeit delayed. Accelerated spending in infrastructure is likely to mute the cyclicality aspect of the cement business. |
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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. |
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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. |
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Consolidation trigger - The industry is lot more consolidated now that it was ever in the past. Top five players account for almost 50% of capacity. Fragmentation reduces pricing power and consolidated operations improve efficiency apart from providing pricing power. | |
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| Key Negatives |
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Slow progress of reforms - Infrastructure spending, in the recent past, has been largely restricted to the government. The private sector has not been provided with 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. |
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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.
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Rise in interest rates - Interest rates are showing signs of hardening. The impact of this on housing demand will play a crucial role on the future prospects of the sector. The importance of the housing sector in cement demand can be gauged from the fact that it consumes almost 75%-80% of the country's cement. If this support wanes, it could tilt the odds against the cement manufacturers. | |
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