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Web Exclusive: Impact assessment of CCI order on cement companies

Puneet Wadhwa/Mumbai 22 Jun 12 | 09:14 AM
 Ambuja Cements Ltd
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The Competition Commission of India (CCI) has finally come down heavily on the domestic cement industry, accusing 10 major players and the industry body – Cement manufacturers Association (CMA) – of cartelisation.

The competition watchdog has imposed a penalty equivalent to 50% of their FY10 and FY11 profits. It has also accused non-CMA members (ACC and Ambuja Cement) of attending CMA meetings and eventually colluding in price hikes.

"For ACC the amount works out to Rs 1147.59 crore. The order relates to competition law proceedings initiated in 2010 which aimed at investigating the conduct of several leading cement producers in India," the company said in a statement.

"In case of India Cements, overall impact will be lower as compared to the other companies since it had lower profits during FY11. Hence, the penalty (net of taxes) gets reduced to to 33% of FY12E PAT, states a Karvy report.

Analysts at Edelweiss Securities suggest that this will be a long-drawn court battle. “We believe it will have an overhang on stocks and potentially dent the industry’s pricing power. We maintain our negative sector view citing unfavourable risk–reward scenario," the brokerage house said in a report.

“The penalty is way ahead of our estimate of about Rs 5,000 crore for 14 companies. It would exert pressure on the stocks. The sector is already grappling with excess capacity. With this order, it may lose pricing power, too. Cement stocks have been outperformers and had run ahead of their fundamentals. For now, one should avoid taking fresh positions in these counters," A K Prabhakar, senior vice-president (equity research), Anand Rathi in an interview. Click here to read the interview

"The top-three, UltraTech, ACC and Ambuja, will have to shell out the maximum penalty, JK Cements and India Cements the least as the penalty has been calculated on profit. The  losers are conglomerates such as JP Associates and Century under Sec. 27 of the Act (in line with international law) as the total profit (including non-cement) has been considered for the penalty. UltraTech benefits as Grasim’s cement profit for FY10 has not been taken into account," states an Anand Rathi report.

As per the assessment of the 258 page order, analysts at Edelweiss say that most of the evidence presented and argued by CCI is circumstantial, but the order also cites of it being used in other countries to prove cartelisation. The commission has stated instances of price parallelism, production & despatches parallelism and inverse relation of drop in utilisations vis-à-vis rising prices as key arguments for holding the companies guilty.

"Unfortunately without any proof we have been found guilty, against which we shall be taking legal recourse. Further to direct a collective body of corporate entities to desist from pursuing its lawful objectives is retrograde," said a statement from India Cements.

Analysts at Kotak Securities believe that cement prices would come under pressure and companies would not be able to enjoy the pricing discipline which they had been maintaining from past several quarters.

Edelweiss report suggests that all accused are likely to approach the Competition Appellate Tribunal, challenging the order, and the case is likely to get dragged into law courts for several years. Hence, they maintain a negative view on the sector.

“ACC furnished all information and clarification requested by the authorities in the context of the investigation. We feel aggrieved by this order and will appeal against it before the Competition Appellate Tribunal," ACC’s statement added.



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Also read: CCI bites Rs 6,300 cr off cement firms

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