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Real estate slowdown hits cement companies
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ASIANAGE on 06 July, 2008 04:21:54
 
By Chirantan Shah
Chennai
July 6: Higher input costs, low market valuations and scaled up capacity amidst
reduced demand is likely to take its toll on the cement industry. The growth
rate of the industry is projected to drop below 10 per cent for the current
fiscal.
According to a report by Edelweiss Research, weak fundamentals and mounting
cost pressures are likely to further pull down the replacement costs, even as
valuations have corrected sharply in the recent past.
High inflation and home loan rates have slowed down the growth trajectory of
the real estate sector, which accounts for 60 per cent of the total cement
demand.
This slowdown is likely to hurt the cement sector the most. The surplus of
cement in the industry is predicted to be as high as 20.7 million tonne in
2008-09 and 47.4 million tonne in 2009-10.
The major expansion plans announced by the companies will further add to their
woes, as low market demand will significantly reduce the capacity utilisation.
Setting up of new facilities will impart additional capa-cities of 34 million
tonne and 45 million tonne respectively in 2008-09 and 2009-10. This is likely
to bring down the capacity utilisation in the industry down from the current 101
per cent to 82 per cent. Even as it loses power to dictate prices, increased
cost of power, fuel and freight will add pressure on input costs.
Among the cement majors, valuations for ACC and Ultratech seem to have bottomed
out with discounts as high as 35 per cent of the replacement costs.
Ambuja Cements too is trading at a higher discount than previous down cycle,
suggesting bottom valuations. However, replacement valuations for Madras
Cem-ents and India Cements indicate scope for further downslide when compared to
their previous down cycle valuations.
The report has suggested that speedy implementation of sixth pay commission and
lower inflation and interest rates are necessary for the up cycle to begin. It
has added that aggressive consolidation in the cement sector can also help them
to avoid surplus production.