CCI order: A one-hit wonder or sign of things to come?

The Competition Commission of India (CCI) order penalising 11 cement companies for forming a cartel has not gone well with the industry. ACC , Ambuja Cements , UltraTech among others which dominate a third of the market have said they will take 'suitable action' against the order.

ACC said the penalty amount works out to be Rs 1147.59 crore, which is 50% of its FY10 and FY11 profits. "We are aggrieved by this order and will appeal against it before the Competition Appellate Tribunal," stated the company in a statement issued late night yesterday.

Similarly, UltraTech will have to fork out Rs 1,175 crore and India Cements Rs 187.4 crore. These companies too will follow suit and take action after studying the order.

Cement companies are keen to decide on future course of action but it will take a few more days to study in detail the 258-page order before it comes out with a concrete plan as cement manufacturers association (CMA) has said it is studying the nature and rationale of the order.

But what needs to be looked at is, will markets shrug off this development as a one time event?

Brokerage JPMorgan has a answer to this one: Earlier in the week,
when news of the CCI order broke, cement stocks actually rallied the next day. The final order imposes a penalty which is materially higher than what was talked about earlier.

The firm further points out that the order's language in terms of  'cease' and 'desist' is also negative and in our view, opens up a whole new chapter on regulatory overhang for the sector. "W view the CCI order as a material negative for the sector and at least for the near term does create an overhang for the sector as it does increase the risk of cement prices being rolled back and we expect stock prices to react negatively to the Order,"stated Pinakin Parekh and Neha Manpuria n their report.

A report by Citi says that the CCI order will have an adverse impact on cement companies as they will not be able to raise prices in the near term. However, costs have been relatively steady, so there is less pressure to do so near term, it stated further explaining that the key will be the ability of cement companies to hold on to prices as we have entered the traditionally low demand monsoon months. "tocks are likely to be weak over the next few days as the penalty amount is higher than anticipated (for two years rather than one). Based on the current penalty imposed on the three major companies, the market cap impact ranges from 3-5% and book value impact from 9-16%," said Pradeep Mahtani and Raashi Chopra in their report.

Jefferies in its reports has estimated an impact on the cement stocks by anything between 4%-15%. However, final outcome will be a long drawn process due to absence of documentary evidence, conflicting data and low profitability in FY10, penalty on few companies only as against the industry being penalized. The firm has maintained an overweight on the sector.