Budget Effect on Cement Sector

Cement stocks hit rock bottom when finance minister P. Chidambaran announced the differential excise duty structure, despite the tight demand -supply ratio, which is not expected to change for the next one year.  Though market experts rated the budget effect on the cement sector as neutral, the top five cement stocks which control 50% of the manufacturing capacity, corrected to a great extent and all long term investors who did not book their profits earlier on ended up making a loss on their investments. Like many other investors, I made a loss in Associated Cement Company Limited (Acc) which is the second largest cement company of India.

If we review the budget for the last 3-4 years, one can see that the treatment given to the cement sector has been topsy-turvy.

In 2004-05 the excise duty on cement was hiked by Rs.50 to Rs.400 per tonne.

In 2005-06 the customs duty on cement was reduced from 15% to 20%.

In 2006-07 the customs duty on cement was reduced from 15% to 12.5%.

In 2007-08 a differential excise duty was levied on cement. A retail price of less than   Rs.190 per bag attracted an excise duty of rs.350/- per tonne while the same was jacked up to rs.600/-, if the retail price exceeded rs.190/- per bag.

Though the cement companies were allowed to pass on the increase in excise duty to the end users, the budget announcement sent across negative vibes to the foreign investors, who were more or less confused with the government policies.

The crux of the story is that the hike did not really make a difference to the profits of the top 5 companies (in descending order, Grasim Industries Limited, ACC, Ambuja Cement Ltd., India cement and B.K Birla’s Century Textiles and Industries Ltd)

But it had a marginally negative impact on the housing sector, as it increased the raw materials expenditure and unlike the cement sector, the big players in the housing sector were unable to pass on the increase to the end-users.

With the nation making progress at rapid a rate, any hike in steel or cement prices, henceforth, will cause a correction in the stock market. It will also cause a steep hike in the raw materials expenditure for the housing sector. It goes without saying that

raw materials like cement and steel are the back-bone of our developing economy.

So, it is my humble request to our honorable finance minister to announce a budget favoring the raw materials, especially cement and steel. This will certainly increase the progress rate of our infrastructures. It will also boost the morale of the retail investors who are disillusioned by the bearish outlook of the stock market.

I am optimistic about the budget for 2008-09. India shining looks like a realistic possibility.

Rajat J. Shetty