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Cement
India
Mixed signals—cement prices not reflecting risk from anti-competition laws.
Cement prices have softened in the monsoon season, but still do not sufficiently reflect
the potential risks of a strengthened anti-competition law and potential action from the
Competition Commission of India. The managements continue to guide for a revival in
cement prices, oblivious of the regulatory risks of maintaining such ‘market discipline’.
We continue to tread cautiously in this mixed trend of sustained prices and
corresponding regulatory risks from a more watchful Competition Commission.
MCA directs investigations into operations of the cement sector
As per media reports, the Ministry of Corporate Affairs (MCA) is likely to direct the Competition
Commission of India (CCI) to initiate action against the top-3 cement manufacturers (UltraTech
Cement, Ambuja Cement and ACC) for price collusion. Media reports indicate that MCA
recommendation is based on Serious Fraud Investigation Office (SFIO) probe carried out earlier and
the ministry is now in the process of forwarding its final report to the CCI for action. We have
been highlighting the possibility of price collusion in the cement industry since April (refer our
reports dated September 7, 2011 “A matter of (anti)trust” and April 13, 2011 “Cement prices -
cartel or can't tell?”).
Price trends do not fully reflect the risks, managements guide for another round of price increases
The cement industry saw an unprecedented price increase of Rs40-50/bag on an all-India basis in
February 2011 and the prices have broadly sustained at those levels except for a decline in select
pockets of West and East India (see Exhibit 1). Continued sustenance of prices at current levels is
surprising given the muted demand environment and industry utilization levels at 75% (see Exhibit
3). The case of prices defying the overall dynamics of demand and supply is further magnified in
South India where average cement prices remain at Rs285/bag despite demand continuing to
trend downwards and utilization rates seeing historic lows (less than 65%).
Cement manufacturers remain confident of another ‘substantial price revision’ post the onset of
the monsoon season to account for rising cost pressures, remaining oblivious of the regulatory
risks of maintaining such a ‘market discipline’. We highlight the lower-than-industry volume
growth by market leaders that have allowed for pricing stability in the various regions as depicted
in Exhibit 4, despite a worsening demand-supply situation.
Penalties under the new framework could be significant compared to erstwhile MRTPC
CCI can impose on each member deemed to be a party to an anti-competitive agreement, a
penalty of up to (1) three times the profit or (2) 10% of the turnover, whichever is higher, for each
year of continuance of such agreement. This could translate in substantial penalties for the top-3
cement manufacturers, which would be in sharp contrast to the nominal penalties under the
Monopolies and Restrictive Trade Practices Act (predecessor of the Competition Act, 2002). Exhibit
5 highlights the intervention by the government in the working of the cement sector in its bid to
control cement prices.
Tread cautiously—risk reward not favorable for large cap cement names
We maintain our cautious stance on the cement sector with a ACC and Ambuja remaining our top
sell ideas, while we remain positive on Grasim—low trading multiples (4.7X FY2013E EBITDA) and
diversified presence with prices of VSF remaining firm through August 2011, hence offering a
favorable risk reward. Exhibit 7 highlights the summary of our recommendations and current
trading multiples of the cement stocks under coverage.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cement
India
Mixed signals—cement prices not reflecting risk from anti-competition laws.
Cement prices have softened in the monsoon season, but still do not sufficiently reflect
the potential risks of a strengthened anti-competition law and potential action from the
Competition Commission of India. The managements continue to guide for a revival in
cement prices, oblivious of the regulatory risks of maintaining such ‘market discipline’.
We continue to tread cautiously in this mixed trend of sustained prices and
corresponding regulatory risks from a more watchful Competition Commission.
MCA directs investigations into operations of the cement sector
As per media reports, the Ministry of Corporate Affairs (MCA) is likely to direct the Competition
Commission of India (CCI) to initiate action against the top-3 cement manufacturers (UltraTech
Cement, Ambuja Cement and ACC) for price collusion. Media reports indicate that MCA
recommendation is based on Serious Fraud Investigation Office (SFIO) probe carried out earlier and
the ministry is now in the process of forwarding its final report to the CCI for action. We have
been highlighting the possibility of price collusion in the cement industry since April (refer our
reports dated September 7, 2011 “A matter of (anti)trust” and April 13, 2011 “Cement prices -
cartel or can't tell?”).
Price trends do not fully reflect the risks, managements guide for another round of price increases
The cement industry saw an unprecedented price increase of Rs40-50/bag on an all-India basis in
February 2011 and the prices have broadly sustained at those levels except for a decline in select
pockets of West and East India (see Exhibit 1). Continued sustenance of prices at current levels is
surprising given the muted demand environment and industry utilization levels at 75% (see Exhibit
3). The case of prices defying the overall dynamics of demand and supply is further magnified in
South India where average cement prices remain at Rs285/bag despite demand continuing to
trend downwards and utilization rates seeing historic lows (less than 65%).
Cement manufacturers remain confident of another ‘substantial price revision’ post the onset of
the monsoon season to account for rising cost pressures, remaining oblivious of the regulatory
risks of maintaining such a ‘market discipline’. We highlight the lower-than-industry volume
growth by market leaders that have allowed for pricing stability in the various regions as depicted
in Exhibit 4, despite a worsening demand-supply situation.
Penalties under the new framework could be significant compared to erstwhile MRTPC
CCI can impose on each member deemed to be a party to an anti-competitive agreement, a
penalty of up to (1) three times the profit or (2) 10% of the turnover, whichever is higher, for each
year of continuance of such agreement. This could translate in substantial penalties for the top-3
cement manufacturers, which would be in sharp contrast to the nominal penalties under the
Monopolies and Restrictive Trade Practices Act (predecessor of the Competition Act, 2002). Exhibit
5 highlights the intervention by the government in the working of the cement sector in its bid to
control cement prices.
Tread cautiously—risk reward not favorable for large cap cement names
We maintain our cautious stance on the cement sector with a ACC and Ambuja remaining our top
sell ideas, while we remain positive on Grasim—low trading multiples (4.7X FY2013E EBITDA) and
diversified presence with prices of VSF remaining firm through August 2011, hence offering a
favorable risk reward. Exhibit 7 highlights the summary of our recommendations and current
trading multiples of the cement stocks under coverage.
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