Probe a blip for cement firms, unless there is concrete result
Although the CCI investigation is sentiment negative, it is too early to conclude that price hikes won’t happen
Fair trade regulator Competition Commission of India’s (CCI) latest probe into possible cartelization has played a spoilsport for cement stocks. As a part of this inquiry, several offices of companies have been raided. Given the rising cost inflation, action by CCI on cement makers could mean a delay in the much-anticipated price increases.
Latest dealers channel checks showed that despite seasonal weakness, cement prices were largely firm across most parts of India. Green shoots of price revival sent many cement stocks soaring to their respective record highs. However, the CCI probe has caused nervousness among investors in cement stocks, leading to a reversal of some of those gains.
According to analysts, although the development is sentiment negative, it is too early to conclude that price hikes won’t happen.
“A probe for pricing discipline is not new for the cement industry, but what is different this time is that their offices have been raided. Still, it remains to be seen what kind of action is taken. Something concrete needs to come of this investigation for stocks to see a huge correction. Investigations of this scale take time to yield results and then cement makers could contest it,” said an analyst with a domestic brokerage house, requesting anonymity.
“As for price hikes, historically, we have seen that hardly any price increases happen in the year-end. Prices start to catch up ahead of the March quarter, which is seasonally strong for the sector,” the analyst added.
In its last order of 2012, the CCI had levied penalties on cement companies for indulging in anti-competitive practices. Then, the regulator had levied a penalty of 0.5 times of profit after tax earned by cement makers in fiscal years 2010 and 2011.
“In case the CCI levies a penalty this time around as well at 0.5x of the FY19 and FY20 PAT (based on the CCI order of 2012), we assess a potential impact of about 5% on stock prices,” analysts at Motilal Oswal Financial Services Ltd said in a report on 10 December.
The CCI had imposed a penalty of around ₹6,400 crore on cement manufacturers in 2012 on charges of cartelization. But cement companies have contested this order in the Supreme Court and the matter is still sub-judice.
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