For the cement industry, there may be little to cheer from the Budget as a change in the method of excise duty levy may peg up their excise outgo far more than was expected. Cement stocks have underperformed markets over the past year on an excess supply scenario and recently rising costs as well.

Higher excise

Now, the Budget has granted some relief on inputs by reducing the customs duty on petcoke and gypsum from 5 to 2.5 per cent. However, the shift from an ad valorem duty to ad valorem-plus-specific duty for cement retailed at over Rs 190 per bag promises to increase the excise incidence for all players. Assuming an all-India average realisation of Rs 230 per bag for cement, the excise outgo earlier would have been Rs 23 (10 per cent). Now, given the new excise duty levy of 10 per cent plus Rs 160/ tonne, this shoots up to Rs 31/bag. Even if the Finance Minister had restored the excise duty rate of 12 per cent and left the duty on an ad valorem basis, the excise duty outgo would have been only Rs 27.60/bag.

Change in basis

Not content with this, the Budget has also removed any options for cement manufacturers to sell at an artificially low MRP. No more will MRP be the base price for calculation of excise duty on cement. Instead the calculation will be on ‘transaction value' which is the sum total of the money received by the seller (the manufacturer here) including the costs of storage etc that he passes on to the buyer.

With the markets already facing excess cement supply, manufacturers may not find it easy to pass on additional costs even if small to consumers (Rs 8 a bag — if the whole of additional duty needs to be passed). Then there is the fact that players in the regions where cement prices rule higher, would face a bigger excise burden to pass on. With prices ruling at Rs 284 in the East (Kolkata), the additional excise outgo per bag of 50 kg would be Rs 36/bag. In the current scenario, pockets in the east and central India may be better placed to absorb hikes as the demand-supply balance is tighter.

Cement prices have generally moderated over the last two quarters. While demand grew by an average 7 per cent in 2010, capacity increased by over 10 per cent. The all-India average price of cement has dropped by around 5 per cent to average around Rs 230-235/bag in 2010. With realisations sharply down and mounting pressure on input prices, the cement manufacturers have faced a big dent on margins over the last two quarters.

The excise hike now may more than offset any benefit from lower duty on petcoke or gypsum imports and doesn't offer players the much needed relief on margin front. The promised higher infra spending and housing support may however offer some fillip to demand. Coal India's recent move to increase prices also comes as an added burden for players here.

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