In a knee-jerk reaction to corporate tax cuts, cement stocks rallied as investors anticipated increased savings and a consequent boost to earnings.
However, analysts say that some cement producers are likely to be better off sticking to the old regime. “Interactions with industry experts suggest: MAT, or low-effective-tax-rate, paying companies are unlikely to opt for the new regime as current tax/holiday benefits they enjoy are higher," Edelweiss Securities Ltd said in a report on 25 September. MAT stands for minimum alternative tax.
For instance, Shree Cement Ltd’s current effective tax rate (net of exemptions/incentives) is less than the revised tax rate of 25%, so it may not migrate to the new regime right away. On the other hand, ACC Ltd, Ambuja Cements Ltd and India Cements Ltd may switch to the new regime, said the Edelweiss report.
In addition to the corporate tax cut from 35% to 25%, the government also reduced the MAT rate from 18.5% to 15%. However, unused MAT credit cannot be used to set off future tax payments in case firms opt for the new tax regime.
“As the cement industry is capex-intensive, companies were allowed investment-linked tax benefits under the old tax regime. Therefore, we expect companies with major ongoing expansions to wait for capacities to get commissioned, in order to avail these tax benefits," Motilal Oswal Financial Services Ltd said in report on 27 September.
Also, the broking house met managements of Dalmia Bharat Ltd, JK Lakshmi Cement Ltd and Orient Cement Ltd to assess the impact of the corporate tax rate cut. These companies said they will not switch to the new tax regime in a hurry, largely due to the depreciation-related benefits of the old tax regime.
Further, in a bid to attract fresh investments, a low tax rate of 17% shall be levied on manufacturing companies incorporated after 1 October 2019, which start production before 31 March 2023. However, analysts don’t expect cement producers to float new entities, because mine transfer fees are estimated to offset gains arising from a low tax rate for new entities.
Also, cement is among those sectors that are battling overcapacity in the wake of muted demand. So, expectations are that tax savings will be used by firms to deleverage instead of expansions.