Cement firms may face strain on profitability

Rating agency ICRA expects cement companies to suffer from strain on their profitability in the coming quarter because of weak demand and the hike in rail freight charges in February 2013. The government announced a slew of measures in the Union Budget 2013-14 to provide a fillip to infrastructure and housing demand such as additional interest deduction of up to Rs 1 lakh on housing loan, enhancement in provisions under Rural Housing Fund and improving funding of infrastructure projects. In order to boost fund flow to infrastructure sector, the government encouraged the setting up of infrastructure debt funds, issuance of tax-free infrastructure bonds, credit enhancement by IIFCL. Besides, it set up regulatory authority to address the problems faced by road projects, planned award of 3,000 km highway projects and extension of 80IA benefits for power projects by one year. Although the rating agency expect these measures announced to support demand for cement in the long term, in the short-term cement demand may be driven by uptick in construction activities and government spending. It may be noted that weak demand for cement post July 2012 reduced the overall growth in all-India cement production to 5.6 percent during 2012-13 from 6.7 percent in the previous year.