JP Morgan: Cement Excise duty increased; Coal India's coal price increase to increase costs sharply

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India Cement
Excise duty increased; Coal India's coal price increase
to increase costs sharply


• Excise duties increased: The budget proposed increasing excise rates
on cement from current 10% ad-valorem to a new structure of 10% advalorem+
Rs160/MT. On current cement prices, it essentially implies
Rs8/bag increase in excise rates (~3.5%). Cement companies have
aggressively increased prices over the last 2 months (even though
demand has been lack-luster) between 5-10%.
• Coal costs increased sharply by Coal India, differential coal pricing
negative for cement companies: Coal India has announced a series of
price increases mainly targeted at non regulated consumers with average
price increases for these consumers being nearly 30% (there have been
sharper increases for Grade A &B coal with prices of these grades being
brought nearer to import parity). 30% increase in coal costs translates
into EBITDA margin impact of 450-500bps (given that cement
companies buy a portion of their coal requirements from the markets, and
plants nearer ports import most of their requirements). We estimate cost
impact for a cement company sourcing 70% of its coal requirement from
linkage as Rs8/bag.
• Cumulative price increase to pass on both excise and coal costs
increase large. Cement companies would need cumulative price increase
of as much as Rs16/bag (7%) to pass on both the coal price increase and
excise duty increase. Given that a) demand environment is sluggish and
b) cement companies have increased prices aggressively, we find it
difficult to see such large increases go through.