Experts say Budget measures will have neutral impact on industry.
The domestic cement industry, which has continuously raised prices since the beginning of the year, is unclear whether the Budget came as a relief or brought an extra burden. Experts say the measures taken by the government will have a neutral impact on the industry.
The government proposed on Monday to replace the existing excise duty, which stood at 10 per cent, by ad valorem and specific components. It also reduced the customs duty on two critical raw materials, petcoke and gypsum, to 2.5 per cent from the earlier five per cent.
The two existing price slabs, below Rs 190 a bag of 50 kg and above Rs 190 a bag, were retained. However, since the all-India average price is currently hovering around Rs 250-260 a bag, the second slab has gained importance, on which the government has imposed a 10 per cent ad valorem charge and an additional Rs 160 a tonne. The additional charges would mean an increase of Rs 8 a bag.
Top officials in the industry, including CEOs and CFOs, declined to comment on what would be their further pricing strategy. “Things are not yet clear. We do not know whether this restructuring of duties will add or reduce our burden,” said the chief financial officer of a north India-based cement player.
Earlier, the Budget note had said the ad valorem rate was applicable to the retail sale price. However, now it will not be on the retail price. “For the purpose of an ad valorem component, the value would no longer be the retail sale price but the transaction value determined under Section 4 of the Central Excise Act, 1944,” noted the Budget release.
The transaction value will be the ex-factory prices, said excise duty experts. However, according to cement companies, their sales from factories are negligible and are mainly from depots, which are away from the factories and near market places. “Bringing the produce from factories to depots adds to the prices,” said the chief marketing officer of one of the leading pan-India players.
Currently, on average, the freight charge is Rs 35 a bag of cement, while the same is given as sales tax. This is further added to by the dealers’ margin of Rs 8 a bag.
According to industry experts, depending on where the ad valorem is charged, there will either be a relief of Rs 2-3 a bag or an extra burden of Rs 2 a bag. “But, further taking into account the relief given in terms of the cuts in custom duty on petcoke and gypsum, there will be a neutral impact on the existing prices,” said the research head of a Mumbai-based broking house.
The reduction in customs duty on petcoke will bring a downside impact of 50-70 paisa a bag of cement while that of the reduction in petcoke will be around Rs 1 a bag, said an industry analyst.
The industry has a total manufacturing capacity of close to 300 million tonnes per annum. Players like ACC, Ambuja Cements, UltraTech Cement, Jaiprakash Associates, Shree Cement and India Cements control over half of the domestic market. The recent rise in prices has not come due to the rise in demand for the building material but rather a disciplined supply to the market by cutting down production.
On the Bombay Stock Exchange, the cement heavyweights lost between 2 and 5 per cent in on Tuesday’s trading. Ambuja Cements suffered the most as its shares were down 4.92 per cent at Rs 118 while the shares of ACC and UltraTech lost 2.21 per cent and 2.88 per cent, respectively. Only Shree Cement could gain on Tuesday, with a rise of 1.31 per cent to close at Rs 1,729.70 a share.
