The cement industry found itself at the centre of a controversy when trade practices regulator MRTPC ordered a probe into the business practices of 14 leading cement manufacturers. The companies that are to be investigated include all the big guns such as ACC, Ambuja Cement, India Cement, Ultratech Cement, Grasim and other smaller players like Sanghi Industries, Birla Corporation, Zuari Cement, Binani Industries, NCL Industries, Saurashtra Cement and JK Cement.
The Director-General of Investigation and Registration (DGIR), which is the MRTPC’s investigative wing, submitted its preliminary report alleging that these manufacturers colluded to hike cement prices.
The DGIR says that it had analysed movement of cement prices, based on demand, capacity utilisation and expansion in 2005 and 2006 and alleges that an interpretation of the above factors suggest that the price increases were unjustified.
The investigating authority did not buy the argument that costlier raw materials and the tight demand supply situation sparked the price rise.
According to DGIR, the impact of increase in cost was only to an extent of Rs 7 per 50 kg bag. However, between April 2005 and March 2006, the price of a 50 kg bag of cement rose by over Rs 50 in the Delhi market. The price rise thus far exceeded the increase in input cost.
The report also said that the Cement Manufacturers’ Association (CMA) served as a platform for discussing price-related issues. The body has various zonal marketing committees where top company executives are present.
This gives them enough opportunity to meet and decide pricing and marketing strategies. The CMA managing committee held three meetings during 2005-6, when “exorbitant price increase” was noticed. With such allegations, government might whip cement manufacturers for any further price hikes, thereby minimising chances of any sharp price hikes going forward. Our concerns for the sector had been that, the Government has been eyeing cement prices and with general elections in 2009, inflation might still remain as a big electoral agenda.
However, our larger concern has been rampant capacity addition that is likely to come up in next 24-30 months. A total of 70 million tonnes of fresh capacity is expected to be commissioned over next 24-30 months. The capacity addition would disturb the demand supply equation and would weaken pricing power of cement producers. We still believe that cement stocks in a longer run would underperform as the bunching up of capacities would take its toll on cement prices thereby affecting profitability of cement manufacturers.
We maintain our neutral rating on the sectors and believe that only companies with volumes play would be better performers in the sector. We maintain our reduce rating on ACC, Ambuja Cement, India Cement and Ultratech Cement and maintain positive stance on Grasim and Madras cement with an accumulate rating.
