Budget 2011: A mixed bag
Given the favourable economic conditions and government's endeavour to stimulate inclusive growth by increased spending, the cement industry will see a quick resurgence from the demand pangs. In 2011-12 demand is likely to revert to its high growth path increasing by more than 11 per cent from the five per cent in the current fiscal year, predicts Nitin Madkaikar, Economist, FirstInfo Centre.
The cement sector which has been reeling under the severe margin pressure amidst demand crunch and rising raw material costs, has not received the any immediate relief from the Union Budget 2011-12. Overall, the Budget would sustain the buoyant economic growth rate through increased spending on infrastructure creating demand for cement in the long term, while the tax proposals are likely to create implementation issues in the interim period. The Budget, within its perimeters called to resolved tax anomaly, has consolidated the specified and ad-valorem rates, the move likely to push up effective prices. As a token, it has also announced cuts in customs duty on petroleum coke and gypsum from 5 per cent to 2.5 per cent. While there are not many manufacturers using pet coke, gypsum is used in small quantities, and hence, the benefit of the cut in duty will be limited.
Further, the Budget has imposed one per cent excise duty on coal, a new introduction. It will add to the cost of coal and increased coal price will have a huge negative impact on the cement industry. Prices of A and B grade non-coking coal have already up by over 100 per cent in recent times while price rise in rest of the coal categories is about 30 per cent. Coal India, the major supplier of coal in India, has decided to revise coal prices upwards. This move would be detrimental for cement makers. Coal India, although did not devolve the quantum, the hikes are likely to be steep when they come. The imported coal contract costs continue to be firm, reeling above $228 a tonne. These hikes will increase input costs for cement majors, exerting pressure on their margins. Looking at the sluggish demand, it will not be easy for the manufacturers to pass on the hike in input costs.
During the first 10 months of 2010-11, cement production inched up four per cent while dispatches were shade higher at 4.2 per cent. The same period of 2009-10 had recorded production growth of more than 11 per cent, and dispatches were up 11.5 per cent.
In his Budget Speech on 28 February 2011, the Finance Minister said, "As a measure of relief to cement industry, I propose to replace the existing excise duty rates with composite rates having an ad-valorem and specific component with some rationalisation. The basic customs duty on two critical raw materials of this industry viz. pet coke and gypsum is proposed to be reduced to 2.5 per cent".
The new tax duty, many opine, is likely to raise the per bag price of cement and would lead to additional burden on cement makers negating their margins. A day after the Union Budget was presented, prices in the Mumbai market, the largest domestic one, were raised by Rs 10 for a 50-kg bag. Analysts and dealers believe that other regions would soon follow suit, especially northern and eastern markets. The average all-India price of a bag has surpassed Rs 265, the highest since the industry entered its downturn. Interestingly, in November the prices were around Rs 220-225 a bag. In Mumbai alone, prices have touched Rs 280 a bag of late and they may soon reach Rs 300 a bag as the peak season set in.
The Cement Manufacturers' Association estimates the restructuring of duties would lead to an extra burden of Rs 3-4 a bag. Looking at the sluggish demand, it will not be easy for the manufacturers to pass on the hike in input costs.
Infra spending push
Historically, government spending on infrastructure, particularly in road sector had a positive impact on cement demand. The Budget proposes to increase the spending by 13 per cent to Rs 1257,729 crore in 2011-12 from the budget estimates for 2010-11. For 2011-12, an allocation of over Rs 214,000 crore is being made for the development of infrastructure sector. This implies a 23.3 per cent increase over the allocations in 2010-11. It also accounts for 48.5 per cent of the gross budgetary support to plan expenditure. Further, in order to boost infrastructure development in railways, ports, housing and
highways development, the Budget proposed to allow tax-free bonds of Rs 30,000 crore to be issued by various government undertakings in 2011-12. This includes Indian Railway Finance Corporation Rs 10,000 crore, National Highway Authority of India (NHAI) Rs 10,000 crore, HUDCO Rs 5,000 crore and Ports Rs 5,000 crore.
Besides the infrastructure sector, the Budget has provided ample stimulant to the housing sector. It has liberalised the existing scheme of interest subvention of one per cent on housing loans by extending it to housing loan up to Rs 15 lakh where the cost of the house does not exceed Rs 25 lakh from the present limit of Rs 10 lakh and Rs 20 lakh respectively. On account of increase in prices of residential properties in urban areas, the Budget has enhanced the existing housing loan limit from Rs 20 lakh to Rs 25 lakh for dwelling units under priority sector lending. To provide housing finance to targeted groups in rural areas at competitive rates, the provision under Rural Housing Fund is enhanced from Rs 2,000 crore to Rs 3,000 crore. To enable credit flow to Economically Weaker Sections (EWS) and LIG households a Mortgage Risk Guarantee Fund is proposed to be created under Rajiv Awas Yojana. This would guarantee housing loans taken by EWS and LIG households and enhance their credit worthiness.
Demand for cement is expected to enter new growth trajectory as infrastructure spending has been stepped up, besides a growing demand for housing. Except the aberration of 2010-11, cement demand has been growing at an average rate of close to 10 per cent since 2004-05. The year 2010-11 saw production up by just five per cent while demand increased 5.1 per cent. In 2011-12, cement demand would revert back to the inflection point as growth trajectory is estimated to shift upwards from its historical average of 10 per cent to 10-12 per cent over next 5-10 years. According to industry reports, all the ingredients are in place for the cement industry to move from a cyclical to a secular growth story.
A higher GDP growth rate of nine per cent, coupled with lower population growth will accelerate per capita GDP growth. Fiscal 2011-12 will add Rs 11 trillion to the GDP, which is expected to have a higher intensity of cement consumption driven by:
- A significant increase in infrastructure investment, and
- Significant impetus to housing, especially rural/mass housing
Intensity of cement consumption will jump from 1.25 times of real GDP to 1.5 times in coming years.
Road to cement
Road projects having a significant potential to drive cement demand, has not lived up to expectations in India. India's track record on road development has been dismal over the period between 2004-05 and 2010-11, when road projects awarded totalled just over 12,000 km. Some of the major reasons for the delay in project awards were the restructuring of NHAI, the formation of the PPP models and the introduction of the Model concession agreement. Besides, factors such as land acquisition, shifting of utilities and execution challenges impacted the projects.
According to the Economic Survey in 2010-11, the achievement under various phases of the NHDP up to November 2010 has been about 1,007 km and projects have been awarded for a total length of about 3,780 km. Steps have been taken to expedite the progress of the NHDP including regular monitoring of contracts and progress reviews, appointment of senior officials by state governments as nodal officers for resolving problems associated with implementation of the NHDP, setting up of a Committee of Secretaries under the Cabinet Secretary to address inter-ministerial and Centre-State issues such as land acquisition, utility shifting, environment approvals and clearances of railway over-bridges (ROBs), simplification of the procedure of issue of land acquisition (LA) notifications, and posting of a Railways officer to the NHAI to coordinate with the Ministry of Railways in expediting the construction of ROBs.
The NHAI formulated Work Plans (Work Plans I and II) for awarding of about 12,000 km each during the years 2009-10 and 2010-11. These plans lay down a specific time frame for various activities and are being monitored very closely at various levels. Under Work Plan I so far 73 projects of 6,426 km length have been awarded and bids for a further nine are at various stages. Under Work Plan II, one project of 170 km length was awarded and bids for five more projects are under various stages of process. Given that a large part of the administrative issues have been sorted, it is expected that the pace of project awards will accelerate.
According to a working group of the Eleventh Five Year Plan, the housing shortage was estimated at 47.4 million at the start of the Eleventh Plan in 2007 and will touch 74 million at the end of the Plan in 2012. More than 90 per cent of the housing shortage is for the people in the EWS and LIG. Rural housing is expected to be a key beneficiary of higher farm income and alternative avenues of income generation due to higher government spending through the National Rural Employment Guarantee Scheme (NREGS).
While urban housing will continue to provide the much needed base for demand for the cement industry, a strong demand pull is expected from infrastructure and rural/individual housing. Due to a slowdown in real estate during the global crisis period, cement demand from this vertical had declined significantly. Despite this, the cement industry's volumes grew close to 10 per cent during that period. Recovery in the real estate sector is critical to sustain 10-12 per cent growth over the long term, as it provides base demand for the cement industry. The real estate sector is recovering. Pick-up in demand is coupled with significant increase in the number of new project launches in the housing segment while the retail and commercial segments are expected to follow suit. This would translate into cement demand from these new projects with a lag of 6-9 months from the launch.
Slum rehabilitation: Can open up opportunity
With over 20 per cent of India's urban population living in slums, slum rehabilitation has assumed major significance for the government to ensure inclusive growth. The Jawaharlal Nehru Urban Renewal Mission has been playing a vital role in slum improvement and in-situ slum rehabilitation. It aims to provide shelter to the urban poor at their present location or near their place of work.
To attract private investment in slum rehabilitation, there will be consideration of transferable development rights (TDR) and additional floor space index (FSI) ratio in provision of shelter to the poor. Rehabilitation of slum dwellers can provide a significant demand pull, as providing permanent housing to 62 million people would consume 75 to 80 million tonne of cement. Besides, construction of related infrastructure would enhance cement consumption.
Poised for healthy growth
Given the favourable economic conditions and government's endeavour for inclusive growth and increased spending, the cement industry will see a quick resurgence from the pangs of demand crunch. In 2011-12 production is likely to increase by over 11 per cent from the current five per cent expected this year. Though cost would continue to dog the industry, higher demand would negate this impact.
ML Pachisia, Managing Director, Orient Paper & Industries Ltd.
The biggest impact on cement industry is on account of the recent abnormal increase in prices of coal announced by Coal India in an off-Budget announcement. The price increase has been anywhere between 30 per cent to 100 per cent. This has indeed come as a major shock to the industry and will have an impact on cost of coal used both in the process as well in the captive power plants.
The reduction in import duties on pet coke and gypsum will have minimal impact, although the move is most welcome.
Increased spending on infrastructure is the need of the hour for India and the higher allocation is a step in the right direction. This will certainly help the cement industry through higher demand for cement from this sector, subject to swift implementation of the planned projects.
The revised excise duty structure will apparently result in increased excise outlay.
Bijay Kumar Garodia, Chairman, Barak Valley Cements Ltd
The reduction in customs duty on input materials is the only relief for the cement industry in the Budget 2011. In the Budget, Finance Minister has proposed to reduce basic customs duty on pet coke and gypsum to 2.5 per cent from the existing 5 per cent. Only gypsum is used for manufacturing of cement in our company but since it does not have a significant use in the production, the change of import duty will not have material effect on our production cost. Further, the Budget also came out with restructured excise duty. In our case, if we sell the cement on FOR basis then due to the change in excise duty there will not be any significant effect on our company. In context of reduced surcharge limit on corporate tax and increase in percentage of MAT, the said increase will be nullified by the reduced surcharge limit. Thus in conclusion, the Budget 2011 has not brought anything significant to us.