In south alone, where most of the capacity creation is planned, close to eight million tonne is likely to be added. Gujarat Ambuja has planned a two-million-tonne greenfield project in Andhra Pradesh while Madras Cements, Chettinad Cements and Grasim Industries (formerly Dharani Cements) are expanding their capacity by a million tonne each in Tamil Nadu. Zuari Cements is setting up a two-million-tonne plant in Karnataka while ACC had announced expansion of the Wadi plant in Tamil Nadu. That apart, L&T was contemplating setting up a grinding unit near Arakonam in Tamil Nadu.

Manufacturers admit that incentives given were one of the major factors that went into arriving at the viability of the plant. Tamil Nadu, for example, offers incentive in the form of sales-tax waiver for seven years or deferral for 14 years subject to a maximum of 100 per cent of the investment made in the project. In Andhra Pradesh, the scheme is similar but the maximum limit is 140 per cent of the project cost.

A million-tonne-plant can save up to Rs 30 crore through the incentive and this plays a vital role in easing the cash-flow problems while at the same time shoring up the bottomline. In the absence of an incentive, the companies would not be able to break-even at current prices, they say.

Assuming an average per bag cement price of Rs 125, the gross realisation per tonne would work out to Rs 2,500. If excise duty, sales tax (Rs 456 per tonne for a sales tax rate of 16 per cent), freight and packaging costs are deducted the net realisation comes to Rs 2,150 per tonne(assuming no bulk sales) as sales tax is recovered and profit neutral. For a million tonne plant, the variable cost per tonne is about Rs 750 while the fixed cost (including depreciation) is Rs 300. Interest cost (assuming a 70:30 debt-equity) for a Rs 400-crore investment comes to Rs 450 per tonne.

This, without taking into account any repayment of debt. On the other hand, if the sales tax incentive-deferal is available, the unit can save interest as sales tax is collected but not paid during the deferal period and as a result cash is used for working capital. If the unit enjoys exemption benefit, it goes straight to P&L Account as the manufacturer not having the benefit will be forced to collect it and this will be reflected in the final price.

The industry is divided over the sudden decision of the government. A section of them say that there is no rationale in withdrawing the incentive and will prevent development of backward areas. Though the state government may lose some sales-tax revenue, other benefits in the form of state's share of excise duty, royalty, development of ancillary units accrue to it, they say.

But there are a few players who question the need for an incentive which, according to them, has become the basis for setting up of a unit. Capacity should be realistically created on the basis of a demand-supply mismatch and not artificially, simply because there is some incentive. Once the demand increases, realisation will improve thus justifying setting up a unit.

But the major beneficiary are the units which have recently gone on stream enjoying the incentives, their valuations would go up considerably and would be much more attractive than others for takeover.