IMPACT: CEMENT

INTERIM BUDGET

• Basic customs duty on non-coking coal reduced from 25 per cent to 15 per cent.

IMPACT
The decision to slash basic customs duty on non-coking coal is expected to benefit cement companies, though only partially.

Considering that international prices of non-coking coal have nearly doubled in the last 12 to 18 months, the reduction in duty will only provide partial relief to cement units. Moreover, the cement industry is largely dependent on local supplies for non-coking coal.

Coal accounts for around 20 per cent of the direct cost of cement makers. Duty cuts, coupled with an expected pick-up in demand, should help cement companies struggling on both the cost and realisation fronts.

Special additional duty of 4 per cent abolished. The combined impact of the reduction of import duty on coal and the abolition of SAD is expected to further cut their cost of production and make the companies more competitive.

OUTLOOK
The cement pricing scenario is expected to improve this year, as demand-supply balance improves. Cement volumes sales grew by 4 per cent y-o-y from 52.1 million tonne in the first half of 2002-03 to 55.1 million tonne in the first half of current fiscal.

Analysts expect a nine per cent growth in volumes in the second half of the current fiscal and a growth of 11 per cent y-o-y for FY2005.

Strong economic growth, government's thrust on infrastructure development and continued growth in housing sector due to a steady fall in home loan rates are expected to be the key drivers in volume growth.

Despite the rise in volumes, the earnings growth of key companies were limited in 2003 due to weak realisations on the back of sluggish price trends.

The not-so-good performances by the companies were also reflected in slack performance by cement stocks, even as the overall market zoomed.

The problem of oversupply is likely to remain, thus impacting future earnings potential. Even though prices have started looking up in the southern and eastern regions, market players are still skeptical about the immediate future.

Impact - Positive

GUJARAT AMBUJA
The company, which imports about 40 per cent of its coal requirement, is likely to be a major beneficiary of the duty cut. The company imports about 500,000 tonne of coal every year.

According to analysts, even the recent improvement in prices post monsoon is unlikely to cause much cheer for the company, as the additional capacity of the Sanghi plant in the west and Grasim's foray into the northern markets will lead to flat prize realisation in FY2004.

Analysts expect earnings growth to be driven by a 10 per cent rise in volumes in FY2004, and by an improvement in cement prices by 1 per cent and volume expansion of 10 per cent in FY2005.

ACC
Not much impact on the company since it does not use much imported coal. Also the landed price of coal is unlikely to come down as international coal prices have gone up steeply.

While, ACC recorded an eight per cent growth in sales volume in the first half of 2003-04, the second half is expected to be even better at 14 per cent.

The deficit in the Eastern region of the country is expected to benefit the company if despatches to the region increases. The stock is trading at Rs 259.90, at a P/E of 28 and is worth a look say analysts.

However, the risk is that the upside may be limited due to expensive valuations, while downside risks remain high as there is a possibility that cement prices will not sustain at higher levels.

GRASIM
Like in the case of ACC, Grasim is unlikely to benefit in a major way since the company uses imported coal only occasionally.

Analysts note that the re-rating triggers are over for the scrip keeping in mind the surge in stock price in recent months.

They also expect earnings growth momentum to slow down in 2004-05 on the back of capacity constraints in VSF and a weak cement- pricing scenario.

However, analysts expect cost reductions due to acquisition of L&T cement could provide an upside to earnings growth, though they are apprehensive about the speed of integration. Earnings growth for 2004-05 is expected to be 13 per cent.