Not so concrete

SPECIAL REPORT

The removal of CVD was the last nail in the coffin for the cement industry.

Bad news has been the order of the day for cement companies. First it was the removal of the 12.5 per cent customs duty on cement in January 2007. Then Finance Minister P Chidambaram introduced a graded excise structure in the budget.

After that, the government talked cement companies into not raising prices. If all this wasn't really enough, the latest measure of removing the countervailing duty (CVD) of 16 per cent and additional duty of 4 per cent last week seems to have hit at the pricing power for the industry.

Consequently, cement stocks have been battered at the bourses in the past three months. Since the beginning of this year, the four largest companies have severely underperformed the Sensex. 

THE CVD TANGLE
	Per 50 kg bag
Import price before	Rs 245
Import price currently	Rs 215
Avg National retail price	Rs 225

While the benchmark index fell by about 7.8 per cent in this period, the share prices of the big four (Grasim, Gujarat Ambuja, ACC and UltraTech) have collapsed by anywhere between 25 and 39 per cent.

Even mid-sized players like Shree (down 38.7 per cent), India Cements (-36.3 per cent), Madras (-24.9 per cent) and J K Cement (-19.5 per cent) have underperformed. So, is the party really over?

While the reduction of CVD and additional duty would lead to a reduction in the landed cost of cement by Rs 30 to Rs 215, this would make imports cheaper than the domestic retail prices of around Rs 225. But issues remain.

While the demand at the retail level scarcely exceeds about 3,000 tonne, the minimum viable shipment load is around 25,000 tonne. Inadequate bulk management systems in Indian ports lead to bottlenecks.

High transportation costs implies that the imports will find it difficult to reach the interiors. The only possibility of import could come from the institutional market where prices have fallen to Rs 184 after the removal of CVD.

There is little doubt however that sentiment will be severely affected and the pricing power of the industry has been badly dented by this measure. The good news is continuing demand supply mismatch and near full capacity utilisation. Players like India Cements, Ultra Tech and Gujarat Ambuja, with significant exposure in the coastal areas will be affected the most.

Also, the differential between domestic prices and imports are the highest in the western regions, implying a greater restraint of companies based here. After the present collapse, the top four cement stocks trade at around 9-11 times estimated FY08/CY07 earnings. Most analysts advise investors to stay out of the sector given the uncertainties over future government intervention.