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Filling Up Cracks

Sowmya Kamath        Print Edition: August 2012

In unity lies strength, seems to be the motto of 11 cement companies on which the Competition Commission of India (CCI) has imposed a penalty of more than Rs 6,300 crore for allegedly colluding to keep prices high.

The order, passed on 20 June, led to some panic in the market at first. The shares of cement companies fell by 0.5-4 per cent the day after, but bounced back in the next few days.

The penalty amount has been reached by adding up half of 2009-10 and 2010-11 profits earned by ACC, Ambuja Cements, Binani Cements, Century Textiles, India Cements, JK Cements, Lafarge India, Madras Cements, Ultratech Cements, Grasim Cements (now merged with UltraTech Cement) and Jaiprakash Associates.

The CCI has asked the companies to deposit the penalty amount in the next three months . It has also directed the Cement Manufacturers' Association (CMA) to stop collecting information about prices, dispatches and products and circulating it among its members.

The companies are expected to challenge the order in the Competition Appellate Tribunal (Compat). The tribunal is expected to give a decision within the next six months, say analysts. The companies may have to pay the fine if Compat asks them to, even if they wish to approach higher courts.

However, the outflow of funds will be from these companies' reserves and is not likely to impact the profit and loss account directly, say experts.

Who comes under CCI net

LIFE GOES ON

Some perceive that the charges levelled by the CCI are subjective in nature and will be difficult to prove in a court of law. "It's the first-ofthe-kind verdict. The order is subjective in nature. Proving the allegations in higher courts will be difficult," says Rajesh Kumar Ravi, research analyst, Karvy Stock Broking.

However, there are concerns over the future pricing ability of these companies. "The CCI's decision will affect the companies' pricing ability. However, I do not see much decline in cement prices," says Jinal Joshi, who analyses cement companies at BOB Capital Markets.

According to analysts, the CCI's decision to disallow the CMA from collecting data may lead to volatility in cement prices but the companies will not engage in any price war. "Cement manufacturers have been through really bad times. The only way to survive is to keep prices stable in a positive manner," says Ravi of Karvy.

The CMA used to collect data about production, dispatches and prices from each cement plant and circulate among its members to give them a fair idea of the demand and supply situation. This helped the companies tune production and dispatches, according to analysts. The wider perception is that the companies will initiate litigation and things will take their own course. The case may take years to reach conclusion.

Even if the companies pay the penalty, there will be a marginal impact of 3-5 per cent on their earning per share, say analysts. "The prices have not been impacted at all. There is no liability looming over the companies. The legal process can continue at upper layers," says Novonil Guha, analyst at BRICS Securities.

Impact likely or not?

WHAT'S IN STORE

Despite the CCI order, cement stocks have outperformed the market amid pessimism about policy paralysis and slackening infrastructure growth.

Cement prices have continued to increase in 2012 owing to rising coal prices and freight rates, demand from the rural housing segment and partial pick-up in the infrastructure sector. However, the margin expansion has been on the back of price rise rather than volume growth, say analysts.

Going forward, monsoon is likely to dampen prices, which have been firm in the first week of July due to delayed rains. However, prices are expected to fall 4-5 per cent from the second half of July as monsoon covers the entire country. However, profitability will remain intact, say analysts.

"The demand will grow by 8-9 per cent, which is much better than in the last two years," says Vijayaraghavan Swaminathan, analyst at SPARK Capital. According to analysts, the demand will be robust in northern and western regions of India.

"We see 10-15 per cent profit after tax (PAT) growth for cement firms in 2012-13," says Ravi of Karvy. On an average, analysts see 13-17 per cent growth in PAT for major cement firms in the June quarter. However, margins are expected to contract.

"The margins are still lower than the 2008-09 levels. There is a down-cycle, but any capacity utilisation about 85 per cent will be a positive," says Guha of BRICS Securities.

How the cement stocks fare?



*TOP PICKS*

Since cement stocks have outperformed the broader market, analysts prefer Ambuja Cements and Ultratech Cements among the large-caps and India Cements and Shree Cements in the midcap space. However, they caution against buying these at current levels, the only exception being India Cements. Cement stocks have outperformed the market for a long period and one must buy at dips rather than plunging into the market at current prices, they say.

AMBUJA CEMENTS
"I will recommend buy on Ambuja Cements around 140 levels," says Jinal Joshi of BOB Capital, adding that her target is Rs 181. "The firm is highly costeffective and is present in states with good demand," she says. Analysts said favourable geographic spread and price made it the top pick of many analysts.

ULTRATECH CEMENT
The company is a top pick due to robust sales. However, a few analysts expect margins to contract marginally in the June quarter. The decline in coal prices will reflect from second quarter onwards. "It's a value stock," says Rajesh Kumar of Karvy.

INDIA CEMENTS
This stock is available at cheap valuations, say Rajesh Kumar of Karvy and Novonil Guha of BRICS Securities . According to a report by Motilal Oswal, the company will be one of the biggest beneficiaries of fall in prices of imported coal. The realisation from southern areas is likely to boost profitability. However, the company is expected to see a decline in June quarter net profit.

SHREE CEMENTS
"Shree Cements is my top pick but I would not recommend it at current levels since it has rallied in the last 30 days. Rs 2,400 is the ideal level for this stock. Shree Cement is based in North India, where demand is strong. Control over costs and a debtfree balance sheet are the key positives. My target is Rs 2,900," says Swaminathan of SPARK Capital. One of the best cement companies in terms of project execution and corporate governance, it is expected to report robust profit growth in the June quarter.

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