Cement shares plunge on penalty; analysts divided on impact

Major cement companies’ stocks declined in early trade on the BSE, reacting to the Competition Commission of India’s order penalising them for cartelisation.

UltraTech shares were down 1.66 percent, Jaiprakash Associates 3.62 percent, Ambuja Cement 3 percent and ACC 2.66 percent.

As many as 11 companies have been asked to pay a combined Rs 6,300 crore as penalty.

“We have not indulged in any cartelisation. We will approach the Competition Appellate Tribunal and challenge the order,” OP Puranmalka, whole-time director of UltraTech, was quoted as saying in a report in the Economic Times.

The companies’ move is in line with expectation.

According to the ET report, Jaiprakash Associates tops the list with a Rs 1,323 crore fine. UltraTech Cement follows with a Rs 1175 crore rupees penalty. Others are Ambuja Cement (Rs 1164 crore), ACC (Rs 1148 crore), Lafarge India (Rs 480 crore), Century Textiles (Rs 274 crore), Madras Cement (Rs 259 core), India Cements (Rs 187 crore), Binani Cement (Rs 167 crore).

In its order, the CCI has told the companies to stop “any activity relating to agreement, understanding or arrangement on prices, production and supply of cement in the market”.

Analysts are, however, divided on the impact of penalty on the stocks.

“We do not expect any financial impact of the CCI ruling in the near term, as we believe these companies will have the option to challenge the ruling in the Competition Appellate Tribunal within 60 days of receiving the final order and later in the Supreme Court,” Nirmal Bang said in a research report before the order.

Major cement stocks had declined in the run-up to the order.

“Our reading on similar action in Germany(January 2002) and Brazil(February 2007) points to a steep correction in cement prices even as players had to concede penalties over long drawn legal wrangles,” Kotak Institutional Securities said in a report.

“We remain concerned about the ramifications of the ruling on the pricing power so far enjoyed by the sector and its corresponding ability to sustain profitability in the face of rising cost pressure,” the report said.

Jefferies, however, begs to defer. “We do not expect any change in the behaviour of the cement companies till the final determination of the case; we therefore expect cement prices in the near-term to remain dependent on the demand-supply scenario,” it said in a report.

Citi also sees adverse impact on the companies, but not in the near term.

“The adverse order by the CCI could make it difficult for cement companies to raise prices in the near term. However costs have been relatively steady, so there is less pressure to do so near term,” it said.

“The key will be their ability to hold on to prices as we have entered the traditionally low demand monsoon months,” it added.

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.”

She expects the stocks to see a correction of 5-6 percent today.