Advance tax paid by top cement firms has declined significantly for the June quarter, indicating the first signs of a possible slowdown in construction activity.
Taxes paid by ACC and Ambuja Cement have declined by 30% and 17%, respectively, while those by Grasim and Ultratech have slid by 25% each, with respect to the year-ago quarter.
Lower tax outgo means lower profit expectations for cement companies arising from shrinking margins and revenue. The April-June quarter is considered the strongest for cement makers, as construction activity peaks during the period. But a 16% decline in the tax outgo for top 10 cement makers seems to indicate a different story.
Indias largest cement maker ACC has paid an advance tax of Rs 45 crore (30% down), Grasim Rs 70 crore (25% down), Ultratech Rs 37 crore (25% down), Ambuja Cement Rs 100 crore (about 17% down), Dalmia Cement Rs 7.50 crore (30% down), and OCL Rs 2.9 crore (67% down).
Several companies having predominant market share in south India have, however, witnessed a significant rise in their tax outgo. India Cements paid Rs 20 crore (54% up), while Madras Cement paid Rs 15 crore (67% up) and Prism Cement paid Rs 19 crore (58% up). This is primarily because the southern market has remained firm through the past year and companies in the region still hold some pricing power due to supply-demand gap.
Companies based in north, east or western markets have seen a decline in their tax outgo, reflecting the market conditions there. ACC, which has a presence in most markets, has fared poorly. It reported a decline in despatches in both April and May. According to Cement Manufacturers Associations figures, production for the industry rose 5.5% and despatches rose 5% in April-May 2008, as against the year-ago period, while installed capacity increased almost 20% in the same period.
The industrys capacity has increased to 200 million tonnes, which according to experts is more than the current need and its impact would be soon visible on prices. Prices will start correcting in the next six months, beginning with northern market, where capacity build-up is maximum, Karvy Stock Broking cement analyst Amit Srivastava said.
But India is not a uniform market and despite excess supply, cement makers could exploit demand-supply gap in micro markets to hike prices. Fuel price hike has raised transportation cost, which will dissuade cement makers to explore markets away from their manufacturing base, Mr Srivastava said, adding firms may cut capacity utilisation to get better prices.