CEMENT MAKERS HOPE FOR A BOOST
The domestic cement industry was starting to show signs of revival when demonetisation happened. The demand slowdown that followed has led to a decline in prices in most regions. The companies are expecting some relief in the Budget. In the southern market, prices fell by 30 per bag in October and November. Prices during the first eight months of the financial year were around 305 per bag, lower by 20 when compared with the same period in 2015/16. A similar decline was seen in western markets. From 265 per bag in October, prices dropped to 240 in November 2016. Northern and Eastern regions weathered the storm better with prices remaining stable at 325-335 per bag. After demonetisation, volume growth has been impacted in all regions. The main reason is the slowdown in the real estate sector, which consumes 63 per cent of the nearly 285 million tonnes cement produced in the country in a year. Even the infrastructure sector, which got an impetus from increased government spending over the past two years, has seen a slowdown.
“In the housing sector, where personal construction accounts for a big chunk of demand, retail sales happen mostly in cash. Demonetisation had an immediate impact, though the dealers are now migrating to non-cash methods. It may take a few more months for things to fully stabilise,” says Shailendra Chouksey, Whole Time Director, Lakshmi Cement. “The infrastructure segment, where very little business is done in cash, has also slowed down due to migration of labour and labour contractors to their home states,” he says.
Analysts rule out a quick revival. The fall in consumption and pricing constraints, courtesy higher raw material costs, will put pressure on operating margins of companies. The gains of the first half, when demand grew over 5 per cent, may be completely wiped out.
“A good monsoon had increased the possibility of a strong revival in demand. However after demonetisation, things have taken a turn for the worse,” HDFC Securities said in its latest report on the sector. “We fear a longer slump in secondary/unorganised real estate markets, which drive a large proportion of cement sales. It is enough to postpone the recovery in demand by another year or so,” it said.
The industry is banking on succour from the Budget. Its main grouse is high tax rates. “Contrary to popular belief, the construction industry is highly taxed. In cement, the extent of taxation is 50 per cent or more on the ex-factory price. On top of that, there is no credit for taxes paid on inputs, there is a service tax of 12.3 per cent on 25 per cent sale price, and a stamp duty of 6-8 per cent on the total transaction value. Hence, the total tax on a finished product, say an apartment, can be as high as 30 per cent,” says Chouksey. “If housing for all is a priority for the government, this needs to be corrected. Lowering of the cost of construction, combined with housing loans at affordable rates, are a must for revival of demand in the sector,” he says.