Cement scrips lost ground on Wednesday on doubts regarding the sustainability of the recent price hike by manufacturers, and also due to broad-based weakness in the market.

ACC was down 1.3% to Rs 148, Gujarat Ambuja Cements slipped by 1.1% to Rs 160 and Grasim Industries declined by 0.6% to Rs 343. The volumes were modest in ACC whereas GACL and Grasim witnessed low volumes. ACC clocked a volume of 4.6 lakh shares, 20,000 shares changed hands on the GACL counter and 9,800 Grasim shares were traded by the first two-and-half hours of trading on the BSE.

Cement scrips have come off their higher levels of late. Part of the decline was also attributed to the broad-based weakness in the market. The BSE Sensex has lost 60 points in the last two sessions amid US-Iraq war fears and concerns over whether foreign institutional investors will continue to invest in India through the participatory note route.

These concerns have stemmed after the Securities & Exchange Board of India, in its discussion paper on a code of conduct for FIIs, mentioned that FIIs should not deal with any derivatives instruments issued outside India wherein the underlying security is Indian, either directly or indirectly. According to market men, this typically happens when FIIs invest in the Indian market through the participatory note. However, they feel that it will be very difficult for Sebi to crack down on trading by FIIs through the participatory note route.

Cement analysts said there were doubts about the sustainability of the recent price hike by manufacturers following the supply overhang, as the companies may resort to year-end dumping of cement to boost volumes. After the Union Budget 2003-04 hiked the excise duty on cement by Rs 50 per tonne - from Rs 350 per tonne to Rs 400 per tonne - cement makers have hiked prices by Rs Rs 3-5 per bag in major markets - in a bid to pass on the burden to the consumers.

Analysts expect the financial performance of cement companies for Q4 ending March 2003 to be bad. The capacity expansions carried out over the last couple of years by most of the cement majors has created a situation of supply overhang, thereby putting pressure on cement prices. Cement demand, however, has been robust. In FY 2002-03 cement demand is expected to increase by a healthy 9.5%. Demand growth is expected to be the highest in the South (about 15%), followed by the North (9%), the West (6%) and the East (4%). Demand continues to be driven by the Golden Quadrilateral road project and the sustained growth in housing construction activity.

Volumes continue to be strong for the cement sector. For the month of February 2003, ACC reported an 8% growth in cement dispatches at 11.48 lakh tonnes, up from 1.06 million tonnes in February 2002. GACL reported a massive 44% jump in its cement dispatches for the month to 871,000 tonnes, with the sharp rise coming on the back of a 2 million tonne capacity expansion carried out by the company at its plant in Maharashtra some time back. L&T's dispatches grew by 18.75% to 950,000 tonnes.

The thrust on infrastructure in the Budget may boost cement demand further. The Centre has announced 48 new road projects at an estimated cost of Rs 40,000 crore (Rs 400 billion), of which 25% of the roads will be made of concrete. Other initiatives include renovation and modernisation of two airports and two sea ports at an estimated cost of Rs 11,000 crore (Rs 110 billion), and establishment of two global standard international convention centres at an estimated cost of Rs 1,000 crore (Rs 10 billion). It is also proposed in the Budget that funds to the extent of Rs 8,000 crore (Rs 80 billion) for the Golden Quadrilateral should be arranged through a special purpose vehicle of the Ministry of Railways. While Rs 3,000 crore (Rs 30 billion) thereof will be equity provided by the Centre, the balance Rs 5,000 crore (Rs 50 billion) will be loans from the market. The repayment of debt will be done by earmarking railway receipts over the period of amortisation.

Another positive development for the cement sector in the Budget is the cut in Central Sales Tax from 4% to 2%.

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