The Competition Commission of India (CCI) finally came down heavily on the domestic cement industry, accusing 10 major players of cartelisation and imposing a heavy penalty equivalent to 50% of their FY10 and FY11 profits. In its order, the commission has relied primarily on circumstantial evidence and highlighted instances of price parallelism, production & despatches parallelism, price and margin increase inconsistent with declining capacity utilization and collection & dissemination of region-wise prices and plant-wise operating details by Cement Manufacturers Association (CMA) to its members. Also, it has accused non-CMA members (ACC and Ambuja Cement) of attending CMA meetings and eventually colluding in price hikes. While this certainly is going to 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 unfavorable risk–reward scenario.
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Alleging cartelisation, CCI imposes above expectation penalties
The CCI has imposed a hefty penalty equivalent to 50% of profits earned in FY10 and FY11 on 10 major companies, accusing them of cartelisation. From our coverage universe, Shree Cement does not feature in the list. The penalty is much higher than market expectation of 8-10% of past three years’ average turnover (Refer table 1). Total penalty is INR63bn compared to market expectation of INR30bn-50bn.
Evidence mostly circumstantial, but argued to be effective
As per our assessment of the 258 page order, 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. It has also cited specific instances of non-CMA members attending CMA meetings, which were followed by price hikes. There were also instances of co-ordinated delays in supply and subsequent discontinuation of order booking in the non-trade category.
CMA asked to desist from dissemination of data to members
CCI has directed CMA to disengage and disassociate itself from collecting wholesale and retail cement prices through member companies and also from circulating production and despatches details (company-wise/plant-wise) which it believes facilitates easy colluding of prices and production parallelism.
Outlook and valuations: Negative; risk-reward unfavourable
All the accused companies 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. We believe it will have an overhang on stocks and potentially dent the industry’s pricing power. We maintain our negative view on the sector.
Regards,
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