CCI levy to hit pricing power, cement stocks likely to correct 3-6%: Analysts

MUMBAI: Cement stocks are likely to correct around 3-6 percent on Friday following the Rs 6,300 crore penalty imposed by CCI in a cartelization case today.

The CCI levied a penalty of nearly Rs 6,300 crore on 11 cement companies in a cartelization case, as reported. The watchdog levied a penalty of 50 percent of the companies’ profits in FY10 and FY 11.

The 11 companies include ACC, Ambuja Cements, Ultratech Cement, JK Cements, India Cements, Madras Cements, Century Cements, Binani Cements, Lafarge India and Jaypee Cements.

Ambuja Cements acknowledged receipt of the CCI order.

ACC may have to shell out Rs 1,500 crore, Ambuja Cements Rs 1,200 crore and Ultratech Cement Rs 1,000 crore as penalty, analysts say.

The CCI has directed the companies to deposit the penalty amount
within 90 days.

Shweta Prabhu, Assistant Manager at Anand Rathi Securities, said: “The CCI order does come as a negative for cement companies. The penalty is higher than Street expectations of around Rs 5,000 crore. Cement stocks could see a correction of 5-6 percent on Friday.”

Prabhu clarified that the order doesn’t result in a derating of the sector. If it’s a one-time payment, it will not impact the sector. However, if it is carried forward, it will be a negative for the sector.

The order will certainly impact the pricing power for cement companies, she added.

Ravi Sodha, Cement Analyst at Elara Capital, said the CCI order is a negative for cement companies, and that pricing power for cement companies will be impacted the most in South India. Cement stocks will react negatively to the order on Friday and could correct by almost 3-4 percent in trade.

Any major corrections in cement counters should be used as an entry point in the sector. The sector’s fundamentals are decent and robust, so pricing power for cement companies may not be lost to a great extent, he added.

“While imposing the penalty, the Commission considered the parallel and coordinated behaviour of cement companies on prices, dispatch and supplies in the market. The CCI found that the cement companies have not utilised the available capacity so as to reduce supplies and raise prices in times of higher demand,” a Ministry of Corporate Affairs press release noted.

The Commission also imposed a penalty on the Cement Manufacturers’ Association. It has been asked to disengage and disassociate itself from collecting wholesale and retail prices through member cement companies and also from circulating details on production and dispatches of cement companies to its members.

The companies are likely to challenge the order in the Competition Appellate Tribunal, analysts said. The CCI’s levy is likely to hurt the future earnings and pricing power of cement manufacturers.

Shares of cement companies have been in action recently ahead of the CCI verdict. The watchdog investigated into allegations that cement companies decreased production to inflate cement prices.

The companies denied the charge, saying prices are controlled by demand and supply forces.