Don't see cement price fall or earnings hit post CCI order: Pros

The Competition Commission of India (CCI) on Wednesday imposed Rs 6,700 crore penalty on 11 cement companies and their lobby group Cement Manufacturers Association (CMA) for alleged cartelization and price collusion. But analysts say that the order is based on circumstantial evidence and are confident it would not hold up to scrutiny if challenged.As such, they believe that it is unlikely that the penalty will eventually be enforced and so, a material impact on companies earnings in the future is unlikely.In an interview with CNBC-TV18, Mahesh Bhadang of Nirmal Bang and Sanjay Ladiwala, Chairman of Cement Stockists & Dealers Association of Bombay, say that cement prices are determined by forces of demand and supply and said they do not expect any fall in cement prices in the wake of the order.On the stock front, largecap stocks may take a hit in the near term given the run-up they have seen recently, said Bhadang. "We prefer midcap cement names like J. K. Cement and Mangalam Cement."Below is the verbatim transcript of Mangesh Bhadang and Sanjay Ladiwala’s interview with Anuj Singhal, Sonia Shenoy and Latha Venkatesh on CNBC-TV18.Anuj: The companies will appeal in Competition Appellate Tribunal (COMPAT) but do you think they will have a fair case?Ladiwala: Yes I would think so because they are quite optimistic. The whole case has been based on a lot of circumstantial evidence and they are hopeful that that will not stand up to legal scrutiny. However, what penalty has been imposed even now has been basically rap on knuckles because they could have imposed a much higher penalty. However, because this was meant like a warning shot and on review they have stood by that penalty. Obviously therefore appeal is the way to go.Latha: Will this mean that future behaviour of cement companies will be different. Having got this rap on the knuckles, should we see either higher capacity utilisation or less evidence of cartelising?Ladiwala: What it means is that circumstantial evidence or something that could be construed as circumstantial evidence would be avoided. It does not necessarily mean that all the evidence which has been collected is definitely pointing towards cartelisation but anything which could even be perceived as such, one would be careful to avoid that. So, that is the only change that would happen because after all in the long-term, prices will be subject to demand and supply and that is going to maintain no matter what.Latha: Would there not be a resistance or at least a scare that you don’t raise prices unless you are absolutely sure? Price impact generally would be lower now, the price hikes would generally be lower now because you have to be careful?Ladiwala: On the contrary, I think because the demand looks good prices would continue and there is no bar on raising prices. It is the concerted effort or perception of a concerted effort, which is barred by law. So, those actions, which could be construed to be, deemed as such would be avoided. However, raising of prices has got nothing to do with it; that is purely because of the demand going up, the prices are going to go up.Sonia: For a retail investor this dip, if it comes through, could be the best opportunity to get into the stocks because it has been in such a big bull market, the sector. What is your view, if we do see a dip would you advice buying in and if yes what are the top picks in the sector now?Bhadang: Firstly, because of the order I don’t expect too much of an earnings as well as stock impact. Probably, there could be some more moderation in largecap stocks because anyways they have run up substantially even before today. So, most of the largecaps, I would wait for a much larger correction to enter as compared to now.However, on the midcap side, we still like some of the north-based companies like JK Cement and Mangalam Cement who basically will benefit from better prices in those regions. However, the impact of the current order, I don’t see too much acting as a negative for the stocks going forward.Anuj: The other issue is does this limit the future pricing power at least in the near-term for some of these cement companies? Would that be a hindrance because that will impact the appetite for stocks?Bhadang: If you go into the history of this order, first complaint was filed by Builders Association of India (BAI) in 2006 for pricing action which happened in 2003 to 2005. So, post that, the kind of pricing upticks that we have seen is visible and that happens because of the increase in cost also. If you look at various cement companies even now, they are not doing more than 15-20 percent EBITDA margins, which I don’t think is higher. In fact the return ratios are in single digit.Given the increase in the capex cost for these companies, those pricing increases are fair. Second thing is that if you look at the current case which is loosely based, the two things which are cartelisation and pricing parallelism, which the commission has mentioned, are very difficult to prove. What they have done is they have proved it on circumstantial evidence as rightly said by Sanjay Ladiwala earlier and hence the case is pretty strong in cement companies’ favour. So, I don’t expect them to actually react in terms of pricing because of the order.Sonia: Ex of this order, how is the pricing situation looking like currently because we have seen a good amount of price hikes in the month gone by and there is an expectation that even in the month of September there could be price hikes in certain regions like West India? What has been the cumulative price hike so far and what is the expectation over the next one to two months?Ladiwala: If you take the average, it has been quite steady though there have been corrections also in most of the regions and then the prices have bounced back especially in areas like Andhra Pradesh. So, on an average, the prices have been slightly lower but nothing new looking to the fact that the monsoons were on and they still are.Going forward, the pricing looks pretty strong supported by substantial demand which is expected to come from the infrastructure segment. November, December onwards we should see that trend continuing. So, as of now, the prices are steady, there is a little volatility but the prices are pretty steady.Latha: I am a little surprised by both of you being so sure and positive about the behaviour of cement companies. Repeatedly the behaviour of the cement companies and the cartelisation charge has come to the Competition Commission of India (CCI), you think that the cement companies can be completely absolved of this charge, no truth at all or is it only because it is difficult to prove they are getting away ?Ladiwala: That is something for the legal experts to opine on that whether it is because of that. However, there are many actions which can be construed as such. The law is a little ambiguous and because of that ambiguity one cannot be held guilty till it is conclusively proved. In fact let me elaborate a little bit on that, that there is a little bit of copy cat behaviour, like for example, if one company reduces the price, the other will follow not wanting to lose market share, the third will follow, fourth will follow. Within a span of 24 hours we see price corrections. Similar thing happens when the prices go up because they don’t want to miss out on the earning opportunity or on the market share. Now if this copy cat behaviour which is there, it could also be construed that within 24 hours if the prices moved up or down it is collusion.