The Hindu Business Line : Excise duty cut, revival package give ray of hope for cement companies

Mumbai, Dec. 12 The recent reduction in excise duty from 12 per cent to 8 per cent and the Government’s effort to revive the ailing realty sector brought in new hopes for the battered cement stocks over the week, though many of them closed flat on Friday due to profit-booking.

ACC gained 15 per cent to Rs 494 over the week, while Shree Cement was up 29 per cent to Rs 450. Madras Cements made up 22 per cent to Rs 73, UltraTech Cement gained 18 per cent to Rs 341, J.K. Lakshmi Cement was up 18 per cent to Rs 39, Ambuja Cements increased 13 per cent to Rs 61, India Cements grew 13 per cent to Rs 95 and Grasim Industries put on 14 per cent to Rs 1,074.

However, except for Shree Cement and Madras Cements, which gained by 6 per cent and 10 per cent respectively, most of the stocks closed flat on Friday.

Almost all the major cement companies have dropped prices between Rs 4 and Rs 8 for every 50 kg bag after the Government announced a four per cent cut in excise duty. The Government is also considering a special package for the housing sector.

Input cost softens

Globally, commodity prices such as crude oil, base metals and coal have been under pressure with the onset of slowdown in economic activity. The fall in commodity prices continued in November and international coal prices dropped 60 per cent to $78 a tonne in December first week from July peak of $193 a tonne. Coal prices are down 14 per cent year-on-year.

Moreover, shipping freight rates have plummeted, leading to a significant drop in landed cost of coal. However, the drop in freight rates was partly negated by 15-17 per cent depreciation in value of rupee against dollar. The sharp fall in international coal prices would lead to softening of domestic prices.

Cost of production moderates

The cut in excise duty and drop in coal prices will bring down cost of production to Rs 12.50 for a 50 kg bag.

“With prices softening by Rs 4 a bag, we estimate that profitability of cement companies to have improved by at least Rs 8 to Rs 10 a bag. Consequently, a significant 20 per cent improvement in profitability of cement companies in Q4-FY-2009,” said Mr Ajit Motwani, Research Analyst, Emkay Global Financial Services Ltd.

Diesel down

Cement transportation cost domestically may also come down with the cut in diesel prices. The reduction of 5 to 6 per cent in diesel prices will result in 1.5 to 2 per cent drop in freight rates for cement companies, depending on the road and rail transport mix. Companies will also benefit on transportation of fly ash — an important raw material — besides clinker to the grinding units.