The Competition Commission of India’s (CCI’s) diktat on cement manufacturers’ cartelization has slapped a harsher-than-expected penalty on 11 firms. The word among analysts was that a fine of 7-8% of the average sales of three years may be imposed. But the penalty is a huge 50% of net profit for fiscal years 2010 and 2011, which is far higher.
No doubt, the steep penalty could have a sentimental negative impact initially. But the companies are likely to contest the CCI ruling in the Competition Appellate Tribunal. Hence, cash outflows to pay the penalty seem unlikely, although the overhang of long-drawn litigation might weigh on cement stocks.
A precedent in case is DLF Ltd, which was fined around Rs 630 crore for abusing its dominant market position. It has been a year since and the case is still pending. DLF has neither paid the fine, nor provided for it as a liability.
Further, cement stocks had corrected in the run-up to the CCI order over the last three months. This was in spite of better-than-expected revenue for the March quarter and higher despatches in April and May. While India Cements Ltd has fallen the most (24%), ACC Ltd and JK Cement Ltd have dropped 8-10% since April. Indeed, cement prices could be in check in the near term, but then it would have been so even without the CCI order, as the next two quarters are typically duller ones for cement firms. Cement prices have, therefore, begun correcting on a pan-India basis already.
From the cement firms’ viewpoint, a demand growth of 7-8% per annum is not sufficient to improve capacity utilization from the current average level of 70-72%, one of the points made by CCI to prove production control by cement firms. Further, the supply overhang is likely to continue, given an addition of almost 55 million tonnes in the next two years.
Given the supply-demand situation, analysts are not positive on the sector. A mere ruling by CCI, which could find its way into long-drawn litigation, is unlikely to change the valuations of cement companies, until a final ruling on penalty payments is made in favour of CCI.
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