UltraTech, Dalmia, Birla Corp, India Cements fall upto 3% today; here's why

The additional tax on limestone will increase the overall raw material cost of Tamil Nadu based cement manufacturers as limestone is a key raw material for manufacturing cement

Shares of cement companies were under pressure for the second straight day on Thursday, falling up to 3 per cent on the BSE in the intraday trade. The decline in cement shares has been triggered after the Tamil Nadu Government levied mineral bearing land tax on many minerals, like Lignite, Limestone, Magnesite, Graphite etc, key raw materials for cement companies. In case of Limestone, Rs 160/tonne has been imposed as the mineral tax.

 

UltraTech Cement, Birla Corporation, India Cements, JK Lakshmi Cement, Ramco Cement, Dalmia Bharat, JK Cement, ACC, and Ambuja Cements were down in the range of 1 per cent to 3 per cent on the BSE in the intraday trade. In comparison, the BSE Sensex was down 0.07 per cent at 73,979 at 11:43 AM.

 

Among individual stocks, Dalmia Bharat share price was down 2 per cent to Rs 1,610.75 in the intraday trade, falling 4.5 per cent in two days. The stock hit a 52-week low of Rs 1,602 on Wednesday. Besides, it has declined 16 per cent from its previous month high of Rs 1,919.85, which it touched on February 2.

 

Dalmia Bharat, in an exchange filing, said the aforesaid tax may impact all Tamil Nadu-based cement producers, including the company. The said levy is likely to have an impact of about Rs 130 crore per annum, which the company will try to pass on to its customers.

 

This additional tax on limestone will increase the overall raw material cost for Tamil Nadu-based cement manufacturers as limestone is a key raw material for manufacturing cement, according to ICICI Securities.

 

Companies like UltraTech Cement, Ramco Cement, and Dalmia Bharat will be impacted from this development as they have significant exposure in Tamil Nadu. The brokerage firm estimates the impact of Rs 75-80/tonne (Rs 4/bag) for Ramco Cement, considering that nearly 52 per cent of its capacity is in the state. For Dalmia Bharat and UltraTech, the brokerage estimates the impact to be Rs 35-40/tonne (~Rs 2/bag) and Rs 10-12/tonne (~Rs 0.5/bag), respectively.

 

Analysts at InCred Equities expect raw material cost to increase by Rs 200/tonne if the proposed taxes are implemented. However, the possibility of the industry negotiating it to lower levels seems more likely, based on the competitiveness between both the states for attracting future investment from investors and similar fiscal profile, the brokerage firm said.

 

It expects other states to introduce similar taxes going forward with stretching fiscal profiles.

 

Further, JM Financial Institutional Securities anticipates the move to have earnings before interest, tax, depreciation and amortisation (Ebitda) impact of ~9 per cent for The Ramco Cement and ~3 per cent for Dalmia Bharat on FY27 estimates.

 

To pass on this cost increase, Tamil Nadu-based players will have to hike cement prices by Rs 8-10/bag. Besides, the brokerage firm sees increasing possibility of other mineral-bearing states imposing additional levies in future.

 

“Given its industry wide impact, we expect cement companies to undertake gradual price hikes to pass on the same. Pricing behaviour over the coming days is a key monitorable," analysts said in a sector update.

 

Meanwhile, the cement industry is highly cyclical and depends largely on the country’s economic growth. There is a high degree of correlation between the GDP growth and growth in cement consumption.

 

The industry is exposed to commodity price risk, arising from raw material price fluctuation (gypsum, fly ash and iron slag) and fuel (coal and pet coke). Coal (indigenous and international) is used for power generation to run its plants and fuel for kilns.

 

In the recent past, the cement industry witnessed a significant spike in power & fuel costs, post the pent-up demand after multiple Covid-19 waves and vaccinations. The Russia-Ukraine war exacerbated fuel cost in FY22 and FY23. Spike in fuel costs impacted the profitability margins for related players in FY22 and FY23 while subdued realisations have been the reason for moderation in profitability margins in 9MFY25, according to CARE Ratings.