By Urmik Chhaya & N Madhavan

In India, cement prices are purely a function of cartels (except in Western India where they are short-lived). Pricing for the cement cartels depends on plant location, which determines the sales tax benefit and the direct costs. The sales tax incentives vary from state to state. For example, Tamil Nadu offers a sales tax exemption for seven years or a deferral for 14 years. The exemption is subject to a maximum of 100 per cent of the project investment. In Andhra Pradesh the same goes up to 140 per cent of the project cost.

In Gujarat, exemption is available for a period of seven years. The 2 mtpa Gujambuja unit of GACL enjoys such an exemption. On the other hand, the 1 mtpa Ambuja Cement unit enjoys a tax deferral.

Tax exemption or deferral of tax is linked to investment in fixed assets. For non-thrust industries, the exemption option is 100 per cent for seven years or 80 per cent for five years. Tax deferral is 125 per cent for nine years or 100 per cent for seven years. This is as per the 1995-2000 industrial policy.

In Himachal Pradesh, the benefit of tax exemption is up to 150 per cent of investment in plant and machinery (P&M), while in Punjab it is up to 300 per cent of fixed capital costs. The exemption is for a maximum period of 10 years for units set up in category A backward areas after April 1996. Gujarat Ambuja enjoys such an exemption.

On the other hand, L&T's Gujarat unit can opt for either a five-year exemption period or a deferral benefit for a period not exceeding nine years. The exemption is, however, subject to a maximum of 100 per cent of the cost of P&M and applicable to sales within Gujarat only. The Gujarat state government has an option of waiving central sales tax (CST) also, as it did in the case of ACC's Wadi plant.

However, incentive policies may vary depending on the area in which a unit is located as well as the time of grant of the incentives. Both deferral and exemption benefits have their own advantages. In the case of exemption, one is not required to pay sales tax, which is, hence, not chargeable. As far as deferral is concerned, sales tax is collected (included in the bill price) but is not required to be paid immediately.

Hence, a cement company enjoying a tax deferral, can use cash for working capital. The cash inflow and outflow also get staggered as it has to pay the sales tax collected in the first year in the 15th year (assuming a deferral period of 14 years) and so on.

Compared to a unit that enjoys exemption, a plant located in the same area but with the benefit of tax deferral is at a disadvantage when the cartel operating in their region decides the price (See table How much).

Depending on the cost structure and freight and packaging charges (which form part of the net cement realisation), such a unit may post a loss. However, it has to be remarkably inefficient to register a loss even after availing of the exemption benefit; or it has to be really an insignificant player in the cartel in the region.

If one compares the four cement majors in the country -- GACL, L&T, ICL and Madras Cements -- it is found that GACL is the most efficient of them all. Though the exact figures of L&T are not available, as far as its material, power and fuel costs (which together account for 75 per cent of the direct cost) are concerned, they are at par with those of the Ambujas (Rs 475, excluding royalty and cess, both of which vary from state to state). And there is no reason to believe that the rest of the cost structure of L&T may be any different from that of the Ambujas.

Ideally, a comparison should be made on a plant-to-plant basis, with all the plants that are to be compared located in the same state. But such comparison figures are not available.

Meanwhile, the other advantage that Ambuja enjoys is that, of its five million tonne capacity (excluding the capacity of its subsidiary), as much as four million tonne is exempt from sales tax.

Though MCL more than makes up for lower NCR in costs, the volume advantage of ICL results in higher profits. Though ICL's acquisition of Raasi was supposed to have resulted in rationalisation of freight costs, the latter have gone up by Rs 50 per tonne in 1998-99. Perhaps the benefit will be reflected next year.

One can arrive at the cost of production (excluding interest in accordance with AS-2) from the closing stock figure, as the lower of cost or market value.

Ambuja, in accordance with sound accounting principles and as required by AS-2, has not included interest in the valuation of its closing stock. Hence, from this year onwards a comparison should be possible.

The interesting conclusion that emerges is that though Ambuja and L&T are almost at par in respect of direct costs, production costs of L&T are slightly lower. ICL figures are post VRS.

The bottomline is that neither cost comparison for plants located in the same region nor the NCR can be different, unless like Ambuja has done in Gujarat, freight costs are pruned down.

For a cement company, profitability depends on the sops granted by the government (sales tax benefits and freight subsidy) and the cartel operating in its region (except in the Western region). The Western region is an exception because it includes Madhya Pradesh and Gujarat.

Gujarat is fed by Rajasthan, which is a cement surplus state and will dump the commodity if net of freight can make any money. Gujarat, in turn, has to feed Maharastra because it is rich in limestone and has excess cement capacity. Table Cost comparison is self explanatory as to why prices in Gujarat cannot move up, a fact that is expected to keep Mumbai prices in check. "Environmental reasons" have so far prevented Gujarat from feeding the Southern market, which has a very strong cartel.