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 % 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 % 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 utilization.

Setting up of new facilities will impart additional capacities of 34 million tonne and 45 million tonne respectively in 2008-09 and 2009-10. This is likely to bring down the capacity utilization in the industry down from the current 101 % to 82 %. 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 discount as high as 35 % 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 Cements and India Cements indicate scope for further down slide 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.