Move on cement will be counterproductive

The 50 per cent increase in excise payable on cement retailing at over Rs 190 a bag (50 kg) is likely to push cement prices higher rather than lower, as intended by the Finance Minister.

Cement manufacturers, distributors and even consumers agree on this issue.

The announcement that excise, currently at Rs 400 a tonne, will be reduced to Rs 350 if the retail price is under Rs 190 a bag, or hiked to Rs 600 a tonne otherwise, has not gone down well and raised fears that cement may be sold in the black market.

Cement retails at an average of Rs 200 a bag across the country, said Mr D.D. Rathi, CFO of Grasim Industries. In high-demand markets such as Mumbai, the price range is Rs 225-250.

"The Government move will only push up cement prices as none of the cement companies, except for a few small ones in South India, sell at Rs 190. The cement manufacturers will only pass on the additional burden to customers, thus pushing up prices further," said Mr Hitesh Agrawal, Senior Research Analyst, Angel Broking.

In an effort to reduce duty by a marginal amount, the Government will in fact increase prices by Rs 12 a bag, because cement sells in retail at more than Rs 190, said Mr Rathi.

"How can you price your product based on what kind of excise duty it will attract? Price is a measure of manufacturing cost and distance, and freight rates have only been increasing. How can I sell at the same price at a place close to my factory and also at a location far away from it," he asked. Excise duty is a pass-through and will anyway end up being stacked on the ultimate consumer.

"Basic economics of demand and supply will overrule everything else," said Mr Krishna Kumar Karwa, Managing Director of Emkay Share & Stock Brokers Ltd.

"Tracking prices at the retail level for calculating excise duty is going to be a tough task," said Mr V.R. Datta, a Mumbai-based wholesale cement dealer.

"If I mark my cement bags to retail at Rs 190, how do I monitor the price at which it is sold," asked Mr Rathi.

In a high demand situation, there is also a risk that cement meant to be sold at an MRP of Rs 190 could be sold at a premium by retailers, leading to blackmarketing, said analysts. This would result in raids on retailers.

"Increased excise duty on cement would eventually be passed on to the consumer. For Indian construction, the costs would be higher and unpredictable," said Mr Y.M. Deosthalee, CFO of L&T, which is a large consumer of cement.

Cement stocks witnessed nervous selling by funds and retail investors. Shares of ACC, the country's biggest cement maker, tumbled by Rs 61 or 6.35 per cent to Rs 900.05, while Ultratech Cement fell Rs 55.30 or 5.84 per cent to Rs 891.10. Grasim Industries lost Rs 119.60 or 5.13 per cent to Rs 2,212.60, Gujarat Ambuja Cements plunged Rs 9.75 at Rs 115.95.