What does CCI have to say on maturity of cement companies?

Excerpts from the transcript of an India Cements conference call with equity analysts post the first quarter earnings of FY12, that could catch the attention of the team at the Competition Commission of India (CCI) probing cement companies (if it hasn't already).

Last week, the CCI fined 11 companies a total of Rs 6300  croer for allegedly manipulating cement prices by forming a cartel. The affected firms have denied the charges and said they will challenge the CCI verdict.

Meanwhile, we leave you with these interesting bits of conversation from the conference call, in which some inquisitive analysts have questioned the management's bullish outlook on cement prices. About 20 analysts participated in the call. India Cements was represented by N Srinivasan, Vice-Chairman and Managing Director, T Raghupathy, Executive Director, and V M Mohan, Joint President, Corporate Finance 

Opening remarks by N Srinivasan in the concall:

Basically we have to look at these results, the backdrop of poor demand during the quarter. The country as a whole had negative growth. In the south, there was negative growth was as much as 7.5%: Andhra and Karnataka being the main contributors. However, in spite of the fact that our volume was slightly lower, we managed because of disciplined increase in prices.

Going forward, we believe that this disciplined pricing will continue during the rest of this financial year and as the demand picks up....as and when the demand picks up, capacity utilization also will go up. Broadly, I mean the story of this financial year is going to be more on a disciplined approach to supply as well as pricing which, the result of which can be seen in the first quarter.

Questions from Reena Verma of Merrill Lynch:

Reena Verma: Just a few questions. Firstly on Mr. Srinivasan's opening remarks that this price discipline will last. Can you share some thoughts on what's been so different about South India in the last two-three months versus other regions which are seeing fairly steep price decline? So that we can understand what the outlook is? Why you are so bullish?

T Raghupathy: Well, probably it is.....it is maturity shown by the players and nothing else madam. That is what it is.
 
Reena Verma: But there are experienced hands in other regions as well, right?....running the businesses. So I am just...I am not asking to how it's working--I am just trying to understand the difference?

T Ragupathy: I think.....I mean, probably they should be able to clarify this better than us, of course.

Questions from Rahul Aditya of Darashaw & Co

Rahul Aditya: You mentioned in your opening remarks that you expect the pricing discipline to be there in this financial year. Sir, actually we are aware of the fact that South India is one of the most fragmented market, if we consider India as a whole. So just wanted to know your view that how or what is giving you confidence that assuming the demand does not pick up in the next six to eight months and smaller players will not spoil the pricing discipline going ahead?

N Srinivasan: See, the pricing discipline is now on for the last 11 months. And I think a lot of people....I mean every company involved has seen the benefit of maturity.

Rahul Aditya: Right.

N Srinivasan: So. I don't see any disturbance; are you talking of disturbance by the players who are already there or by the new players or by what?

Rahul Aditya: I am talking about the existing players, as well as the new players who are coming up with, I mean quite a high capacity in the southern region?

N Srinivasan: The only new player is Jaiprakash Industries.

Rahul Aditya: Exactly.

N Srinivasan: But I don't believe they will....they are going to cause any problem.

Rahul Aditya: Okay. And to one more I just wanted to know your view and your experience, basically now we are seeing a player like JSW Steel entering into basically the cement industry. So, how do you view the entry of a player who was not earlier into the sector. I mean how do you think that this would impact dynamics going ahead?

N Srinivasan: I don't see--Jindal is not the only new player who has come. We've had Jai Jyoti Cement, we've had Bavya Cement, we have had Bharti Cement, we've had Lalita Cements. See, a lot of new players have come in who with no previous cement experience...and but they've all blended in, so I don't expect any problem with Jindal.

In response to moneycontrol.com's queries on "pricing and supply discipline" and "maturity of the players", this is what a senior India Cements official said over the phone:

"The pricing discipline refers to our field marketing staff who were earlier selling stock in the market at any price. Also, on the supply side, stocks were being sourced (by the field staff) from far off plants, perhaps for inventory considerations, when the stocks could have been sourced from the nearest plant. That is what we meant by supply discipline.

Cement companies have realised the folly of trying to increase their dispatches by undercutting rivals. In 2010, the reason for cement prices to fall nearly 30-40% was because many players were selling cement at prices below their variable cost. And it still did not boost their sales. So, all the players have become much more mature after their experience."