Cement scrips have lost up to 28 % since their March-April highs due to concerns of oversupply and, consequently, lack of pricing power. Flat production numbers and sharply lower capacity utilisation in June and July (partly due to the high-base of last year and seasonal factors) has aggravated the problems.
Not surprisingly, June quarter results of leading players were disappointing, due to pricing pressures, higher costs and logistics issues. However, brokerage house Religare believes these negatives are already factored in and demand upturn led by stronger consumption from the construction segment by end-2010 will mean the downside from current levels is limited.
Though EBIDTA per tonne for 2010-11 is likely to bottom out at Rs 400-1,000 for cement companies due to higher freight, power and fuel costs, this is higher than the Rs 200-300 recorded during the last downtrend in 2001-02.
Best Bets: Orient Paper (efficient diversified play), Shree Cement (diversified operations), UltraTech (largest player) and Birla Corp (best mid-cap scrip), Madras Cement (hovering around year low but has strong fundamentals) to deliver returns in the region of 32-40 % over 12-18 months.
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