Cement - Budget: Neutral for excise; positive for coal imports; :: Edelweiss PDF link

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The Budget 2013 had two main announcements: a) Increase in excise duty to 12% (from 10%) while reducing the fixed component to INR120/t (from INR160/t earlier) and also introducing 30% abatement on retail price; and b) reducing the import duty on thermal coal to zero from 5%. While the change in excise rate may lead to duty being higher by ~INR60/t, we expect the industry to be able to pass it on to the consumers and hence assess the impact as neutral. The reduction in customs duty on imported coal will reduce the cost for coverage companies in INR9-29 range. The largest beneficiary will be India Cement due to >60% exposure to imported coal.    

Excise duty rationalised

The Budget 2013 has rationalised the excise duty on cement manufactured and cleared in packaged form by doing away with the erstwhile system of grading based on retail selling price (RSP). Instead, it has prescribed a unified rate of 12% plus INR120/t (from 10% ad-valorem plus INR160/t earlier).

It also notified cement under section 4A i.e. RSP based assessment with an abatement of 30% from RSP. While the duty under the new excise structure is higher by ~INR 60/t (assuming an all India average price of INR280/bag), the working has been simplified to a large extent. Under the old method, excise was calculated on RSP net of dealer margin, VAT, freight and fixed excise duty component. Under the new method, it is calculated on 70% of RSP plus thefixed rate.  (see table 1)    

Impact: Netural. We believe the industry will be able to pass on the cost to end user.

Customs duty on coal imports reduced to zero 

Customs duty on coal imports has been reduced to zero from 5% earlier. Under our coverage universe, companies that are majorly exposed to imported coal are India Cement (~60% of requirement), Ambuja Cement (~40% of requirement), and UltraTech Cement (~38% of requirement).

As a result, the cost for Ambuja Cement and UltraTech Cement is expected to reduce by ~INR16/t and ~INR19/t respectively leading to potential earnings upside of 2-3%. India Cement would be a major beneficiary, with expected cost reduction of ~INR30/t leading to potential earnings upside of ~8%.

We currently have 'BUY' recommendation on India Cement with a price target of INR124/share. 

Cement - Budget: Neutral for excise; positive for coal imports; sector update