Tamil Nadu’s limestone tax: A crushing blow to cement margins?

Ramco Cement and Dalmia Bharat are expected to bear the brunt, while industry giants UltraTech Cement and Adani will see minimal impact. states may follow, compounding challenges for the sector.

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Tamil Nadu’s tax, effective 20 February, stems from a Supreme Court ruling last July that allowed states to levy mineral taxes. Following the decision, the state enacted the Tamil Nadu Mineral Land Tax Act, adding ₹140-160 per tonne to cement production costs, according to Jefferies.

This follows Karnataka’s move to introduce a mineral tax of ₹20-100 per tonne, though that bill remains pending. If more states adopt similar measures, the financial strain on cement companies could escalate.

Higher costs, limited pricing power

Limestone accounts for about 65% of cement production costs, and the new tax will push up expenses further. Yet, cement manufacturers face a dilemma: pass on the costs to consumers and risk denting demand, or absorb them and see margins shrink.

The industry’s weak pricing power makes cost pass-through difficult. Excess supply, fierce competition, and regional price disparities have capped price hikes. Over the past 14 years, cement prices have grown at a meager 3% annual rate, lagging inflation, according to IKIGAI Asset Manager Holdings.

Repeated attempts to raise prices last year failed as demand softened. The real estate sector, which drives over half of cement consumption, saw home sales drop 4% in 2024—the first decline since 2020—after surging 71% in 2021, 54% in 2022, and 31% in 2023, according to Anarock. The slowdown has taken a heavier toll on the Nifty Realty index, which has plunged 25% over the past six months.

Construction activity has also slowed. GDP data for Q3FY25 shows the sector growing at 7%, down from 10% a year earlier.

Southern India to bear the brunt

A slowdown in the two primary demand drivers—real estate and construction—has made it difficult for cement companies to raise prices. 

The situation in southern India is even more challenging, with cement prices at multi-year lows and excess capacity leading to industry consolidation, particularly after Adani Group’s entry into the market.

Passing on the new tax burden to consumers will be tough, adding pressure on Ebitda per tonne and margins. 

According to JM Financials, cement producers in Tamil Nadu would need to raise prices by ₹8-10 per bag to fully offset the impact. However, this may prove difficult, as cement prices in the South have already fallen 11% from Q3FY23 to Q3FY25, hitting a multi-year low of ₹336 per 50 kg bag—down 2.3% quarter-on-quarter, per Kotak Institutional Equities.

Kotak Institutional Equities expects companies to take a middle path—partially passing on the tax while absorbing some of the cost. Even then, price hikes are likely to be modest due to the fragmented nature of the southern cement market, where the top five companies control over 60% of capacity, keeping competition high and realisations low.

Ramco and Dalmia face the biggest hit

The tax’s impact will vary depending on each company’s exposure to Tamil Nadu. Ramco Cement, with 50% of its clinker capacity in the state, is expected to take the hardest hit. Kotak Institutional estimates a ₹81 per tonne impact, translating into a 9.9% reduction in Ebitda.

Dalmia Bharat, which has a 26% share, is also set to face a significant blow, with management estimating an annual impact of ₹130 crore. Its Ebitda could decline by ₹41 per tonne, or 4.4%. The additional cost burden could also erode its competitive edge against rivals sourcing limestone from other states.

In contrast, UltraTech and Adani Group will be relatively unscathed, given their limited presence in Tamil Nadu—just 3% and 1% of total capacity, respectively. Kotak Institutional estimates the impact at ₹5 per tonne for UltraTech and ₹2 per tonne for Adani, translating to a marginal 0.5% and 0.2% hit to Ebitda.

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The South accounts for 35% of India’s limestone production, with Andhra Pradesh leading at 13%, followed by Karnataka (10%), Telangana (7%), and Tamil Nadu (5%), according to the Indian Mineral Yearbook 2022.

With Tamil Nadu contributing just 5% of total output, the immediate impact of its new tax has been largely confined to smaller players like Dalmia Bharat and Ramco Cement. However, the move could set a precedent, prompting other states to impose similar levies—escalating costs across the industry.

Among major limestone-producing states, Rajasthan leads with 22% of total output, followed by Madhya Pradesh (13%), Chhattisgarh (11%), and Gujarat (6%). The remaining 13% comes from various other states. 

For more such analyses, read Profit Pulse.

If more states follow Tamil Nadu’s lead, the sector could face a widespread cost surge, forcing cement companies to either pass on higher prices—potentially denting demand—or absorb the hit, squeezing Ebitda per tonne across the board. Even a middle-ground approach would still weigh on margins.

A silver lining

Companies operating in northern, western, and eastern India are better positioned to weather the storm, thanks to stronger demand and lower competitive intensity. These players may find it easier to pass on higher costs.

Analysts at Motilal Oswal remain positive on UltraTech Cement and JK Cement, citing their diversified geographic presence, strong capacity utilization, and expansion strategies as key strengths in navigating the shifting landscape.

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Tamil Nadu’s mineral tax is a warning sign for India’s cement industry. While larger players like UltraTech and Adani remain insulated for now, regional firms like Ramco and Dalmia are already feeling the squeeze. If other states follow suit, the sector’s fragile pricing power and margin pressures could intensify, forcing tough decisions across the board.

Note: Throughout this article, we have relied on data from www.Screener.in. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.  

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Madhvendra has been a passionate follower of equity markets for over seven years and is a seasoned financial content writer. He loves reading and sharing his opinion about publicly listed Indian companies and macroeconomics.

Disclosure: The writer does not hold the stocks discussed in this article.