Cement sector - regaining strength!

Rising inflation had forced the Indian Government to play a proactive role in fixation of prices for the cement sector. As a result, the Government had announced a flurry of steps during recent months leading to the fury of the cement manufacturers around the country.

In January, the import duty was reduced to zero from 12.5%, and in April, the countervailing duty and additional customs duty on imported cement was reduced to nil. This posed threat of imports at prices lower than the local prices, but imported cement has certain entry barriers like high freight, infrastructure bottlenecks, plus cement industry is highly localised, bulky and have just 45 days shelf life.

The 2007 budget changed the excise duty into 2 slabs (from the earlier Rs. 20 per 50kg bag) to (a) Rs. 18 per bag for prices lower than Rs. 190 per bag and (b) Rs. 31 per bag for prices above Rs. 190. But this measure was highly protested by the industry as cement prices of large players are more than Rs. 190/bag, as such in May, the government announced excise duty to be charged on an ad valorem basis at 12% on cement sold above Rs190 per bag.

During last 2 years, CAGR of India’s cement demand was 10 % as compared to 8% in previous 10 years. This is due to strong demand from the housing sector, IT and infrastructure projects. The demand is expected to be robust in coming years too though the increasing interest rates may reduce housing demand, which may be offset by demand from SEZ’s.

The future of cement industry depends on how cement producers react to Govt. measures, but for short term, the cement stocks may witness selling on account of recent policy changes, increased import threat from Middle East, reduced earnings, and negative earnings growth.

But the Indian growth story still remaining intact, and long term fundamentals remaining sound, investment in cement stocks can be made for a longer term perspective.