Budget measures: A mix bag

Budget measures: A mix bag

The Union Budget 2015-16, the first by the new government at the Centre, is a mix bag for the cement industry. Though there is a hike in excise duty on cement and cess on coal that may adversely affect cement industry, the government's thrust on infrastructure and urban and rural housing will provide cement companies some relief. The hike in excise duty on cement, and a host of other taxes and cess on raw materials like coal has faded the hopes of the industry on the Budget as the industry was already impacted by a round of hike on freight rates in the Rail budget.

The government has increased the excise duty on cement by Rs 100 per tonne to Rs 1,000 per tonne in the current Union Budget presented by the Finance Minister on February 28, 2015 in Parliament. "Tariff rate of excise duty in goods falling under Chapter subheading 2523 29 is being increased from Rs 900 per tonne to 1,000 per tonne," Finance Minister Arun Jaitley said in his Budget speech.

Price hike
The cement makers are burdened by the Rs 100 per tonne excise duty hike in the Budget on top of an increase in rail freight. They are now likely to increase retail prices by Rs 15-20 per bag soon.

The excise duty hike is expected to raise cement manufacturing cost by Rs 5 per bag. This is over and above a Rs 7-10 rise in manufacturing cost due to freight rate hiked in the Railway Budget. Due to these hikes, the retail price of cement is likely to go up in the range between Rs 15-20 per bag soon.

Railway Budget also proposed increasing freight rates of coal and slag, used in the making of cement, by Rs 45.70 per tonne and Rs 20.9 a tonne respectively; and also hiked rate by Rs 21 per tonne for cement, but reduced tariff for limestone by Rs 2.7 a tonne.

As per ICRA report, cement companies raised prices by Rs 5-20 per bag bag in October but prices again came under pressure in the months of November and December due to slow recovery in demand. The average wholesale cement prices in Delhi dipped from Rs 290 a bag in July to Rs 268 per bag in September last year. Post-monsoon, prices increased to Rs 288 per bag in October but again declined to Rs 260 per bag in November and Rs 253 a bag in December.

According to ICRA, though there had been a slow recovery in cement demand and the prices post monsoons, the profitability of the cement firms improved in the first half of 2014-15 but still remained subdued. The doubling of the clean energy cess on coal to Rs 200 per tonne would also impact the manufacturing cost of cement.

The brighter side
Industry players, however, have something to relieve in the proposed additional Rs 70,000 crore spendings on infrastructure sector, hoping that it would boost demand for cement. This was visible in the shares of major cement companies after the Union Budget.

Shares of cement manufacturers have surged with most of the frontline companies trading at their lifetime high on expectation of demand in the wake of Rs 70,000 crore additional investment in infrastructure proposed in the Budget. UltraTech Cement, ACC and Ambuja Cements have touched their respective all-time high price on the Bombay Stock Exchange (BSE) soon after the Budget. While JK Lakshmi Cement, Mangalam Cement, India Cements, Orient Cement, JK Cement, Birla Corporation, Grasim Industries, HeidelbergCement India and Prism Cement were up 3-12 per cent.

The government´s commitment towards housing for all by 2022 will involve construction of 20 million houses in Urban India and 40 million houses in rural India. This is expected to boost cement demand from the housing segment. Higher rural allocation to translate into higher construction activity, thereby benefiting the cement sector on a whole, according to Angel Broking´s Budget 2015-16 review. Another positive of the Budget is the government proposal to provide an additional investment allowance and additional depreciation to new manufacturing units set up during April 1, 2015 to March 31, 2020 in notified areas of Andhra Pradesh and Telangana, which should benefit the companies like UltraTech Cement, India Cements, Ramco Cements, Orient Cement and Dalmia Bharat.

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