Cementing Good Returns

Jun 14, 2017 | 02:24 PM IST

Good and Service Tax (GST) is the flavour of the season. While most of the sectors are excited about the bright prospects of GST, cement sector has little to celebrate as it has been placed in the highest tax bracket of 28%. In the existing tax scheme, the sector was paying far less tax than what it will have to pay once GST is enforced. The investors might ask--as a natural reaction, would the stocks of this sector take a plunge? Not really.

Here's a catch. Though the tax has been increased, cement is one such commodity which always stays in demand. So there might be few bumps here and there but there is a lot happening in this sector which will keep the meters rolling for the industry as well as for the investors.

The Demand & Supply Equation

This is the critical part. First, we have to understand the demand-supply dynamics of cement in India and abroad. While expressing their displeasure at the government's decision, most of the industry experts have said that the demand for cement is on the decline for last many years. At the same time, they complain that the tax incidence on cement in India is around 60% which is highest compared to other countries of the Asia-Pacific region. For example, if the cost of one cement bag is Rs. 100, Rs. 60 will be tax and logistic expenses.

Another thing that we have to take into account is that cement is a capital intensive industry where huge capital needs to be employed. The lower taxes would have helped the cement industry to stabilise.

So What Are The Factors Which Will Elevate The Cement Sector?

Many investors are asking that if the cement sector is in such distress than what is the future of this sector? Does it offer growth to the investors? Let's micro-analyse cement sector, its production and its present and future demand. After all, in the stock market, the stock is a reflection of the company's progress.

In the past, the cement sector has been a wealth creator. Many of the cement stocks, namely ACC Cement, Ambuja Cement, UltraTech Cement, Kakatiya Cement have given handsome returns to the investors. And the same can be expected from it in the future as the demand for cement is going to increase by leaps and bounds thanks to various development projects initiated by the government that bring cement directly into focus.

In the general budget 2017, the finance ministry made generous provisions and packages for infrastructure and real estate sectors. The government has many ambitious development plans i.e. highways, subways, flyovers, etc. These infra projects are going to be carried out across the country. As cement is the key component of the infra projects, it will be safe to assume that the demand for cement will accelerate once the projects are in full swing.

Another major reason is government's housing development scheme - Pradhan Mantri Awas Yojana. This will be instrumental in creating more demand for cement in the near future. Meanwhile, since last couple months, the speed of real estate projects has picked up while private infra projects are also gaining momentum. These developments are bound to give cement sector a massive push.

Proactive State Governments - A Positive Sign

Southern states like Andhra Pradesh and Telangana have maximum cement manufacturing plants due to rich natural resources in these regions. Also, states like AP, Telangana and Tamil Nadu are amongst the top cement consumers. Recently, in these two states, there was a standoff between builders and the cement companies over the increasing rates of cement. However, due to successful mediation of the state governments, the matter has been resolved. This is a positive sign for the investors as the demand for cement is expected to increase in the next 2-3 years mostly due to big development projects started by the state and the central governments. It's a positive news for the investors as the demand will stay stable for a considerable period which will bring healthy returns to the producers and subsequently to the investors.

Key Takeaways

The cement industry is at crucial crossroads at this point. It has been put in the highest tax by the government which naturally created some distress in the industry, however, as it is an essential commodity, consumers are going to buy it whether its prices are high or low. This brings us to the key question - does cement have a growth potential? Yes, it does. As we mentioned above - cement sector has been a wealth creator - it still retains that wealth creation potential. However, as some pricing and taxing issues are still going on, the investors will have to look at the bigger picture. Long-term investment in cement will be an ideal option.

Disclaimer - The stocks mentioned in the above article are only to illustrate the point in the context of the article. In no way, readers should look at these stocks as recommendations of Niveza. Stock recommendations are sent only to the registered customers via official channels i.e. SMS and Email.

 

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