Mithun Roy

Mumbai: The withdrawal of Duty Entitlement Passbook (DEPB) benefit for exporters, as part of the government’s efforts to rein in inflation, may not be enough to bring down cement prices.

In fact, if cement dealers and analysts are to be believed, prices might actually be hiked by Rs3-5 per bag from April.

The government last week withdrew DEPB incentives on a number of products, including cement. This means these companies will not able to claim drawback of import duties paid on any raw material used for manufacturing the items exported.

For cement companies, coal is the only imported material used, on which they enjoyed a 5% duty drawback. Given that cement export volumes are rather thin, the drawback amount isn’t difficult for the manufacturers to absorb. To top it all, domestic demand is quite strong, which means the companies need not reduce prices at all.

H M Bangur, president, Cement Manufacturing Association and managing director, Shree Cement, told DNA Money, “There would be no major impact of DEPB on cement industry. The demand for cement has increased almost 9-10% compared to last year.”

Analysts Revathi Myneni, Navin Sahadeo and Archana Khemka of Edelweiss Research said in a research report that the DEPB withdrawal is likely to have an insignificant impact of 0.2% to 1% on the earnings of the companies. The impact is negligible at Rs3 crore for Ambuja Cements and Rs10 crore for Ultra Tech. This is insignificant in relation to their earnings for CY07/FY08E - Rs1,100 crore for Ambuja Cements and Rs1,000 crore for Ultra Tech, the report said.

Meanwhile, given the strong demand, cement company officials and analysts are looking at prices trending up.

A K Saraogi, CFO & president (corporate affairs), J K Cements said, “DEPB (withdrawal) has hardly any impact on us as we are not exporting cement. But, there is good demand for cement, which may lead to increase in prices next month.”

J K Cement currently retails at Rs230 per 50 kg bag in Delhi, Haryana and Western Uttar Pradesh.

An analyst with a local brokerage said, “Due to DEPB, the cost of export will increase by up to Rs60 per tonne, depending on the company. Moreover, the next few months are the peak season and there is the possibility of a price hike in April.”

In Gujarat, prices are expected to rise by Rs 5-7 per bag due to increase in value added tax (VAT). VAT rate is scheduled to increase in the state from 12.5% to 15% from April 1, 2008.

Prices are also set to increase in the South, where government intervention in Tamil Nadu and a softening of prices in some parts of Andhra Pradesh, had ensured there was no price hike in March. Dealers see a hike of Rs3-5 per bag across the four states from April 1. Currently, prices are at Rs255-260 per bag in Chennai and Rs220-225 per bag in Hyderabad.

Bangur, however, said it wasn’t the cement companies but “market forces” who decided cement prices.

Industry experts believe a price hike is inevitable in view of the 10-15% hike in coal prices in the past few months, which is eating into the margins of cement manufacturers. The cost of coal is around 12% of the total operating cost of cement firms.

Source : DNA