CCI order: After cement biz, tyre cos on radar, says Tulsian

In an analysis of the impact of the CCI penalty on cement companies guilty of cartelisation, SP Tulsian of sptulsian.com explains that the CCI order has rightly linked the penalty to profits. The market analyst adds that the tyre sector is high on the CCI radar.

Below is an edited transcript of the analysis on CNBC-TV18. Also watch the accompanying video. Q: What kind of damage do you expect the CCI's penalty of 50% of FY10 profits to cause cement companies?
A: Firstly, the CCI has rightly linked the penalty to profits as it varies form company to company. Secondly, the penalty is very much on expected lines, but there is a bit of confusion that maybe the CCI will be lenient and the penalty of 2-3% will not be levied.
Thirdly, the CCI has made it clear any  kind of cartelisation will not be tolerated. There are many loss-making cement companies who maybe given a reprieve to an extent. Lastly, the impact on companies like UltraTech, ACC and Ambuja Cement who have an effective capacity of 25 million tonnes will be an increase in liabilities of Rs 500-600 crore. Q: How would you approach India Cements? What kind of reaction do you expect both on the frontline and smaller cement stocks?
A: Overall, it will be negative for all cement stocks. But in the case of India Cement, which has the poorest profit margins, the impact will not be so severe as in the case of the other companies. Ambuja Cement and Shree Cement which enjoyed margins of 45-48% in FY10 will be the worst affected. Overall, India Cement will be the least affected in terms of the absolute amount of penalty. Q: Will cement companies approaching the Appellate Tribunal or the Supreme Court?
A: The guilty cement companies will definitely not sit quiet as they are all large enterprises. They have a good case to fight in the Supreme Court and the quantum of penalty of Rs 6,300 crore is quite big.
The combined liability of ACC and Ambuja comes to about Rs 1,200 crores and similar is the case for UltraTech and Grasim whose combined capacity is 50 million tonne. Q: How watertight is their case?
A: I don't know if the CCI will be able to prove allegations of cartelisation, as it will be a pure question of law before the Supreme Court.
The case depends on the provisions of the competition law and documents that the CCI has relied upon to penalise the companies on charges of cartelisation.
I see the chances of order to be stayed or upheld by the Supreme Court to the extent of 30% which means there is a 70% chance of benefits accruing to companies. Q: Even if these companies plan to approach either the Supreme Court or the Appellate Tribunal, the penalty will have to be deposited first. How will impact the financials as the quarter comes to an end?
A: I am not aware about the procedure. But under the income tax laws, there are precedents that mandate a deposit of 50% of the penalty, but I am not sure if they will really be asked to because there are very few instances.
But even if I think companies are not required to deposit any upfront, they will first get a stay the moment their appeal is admitted and could be a big relief to all litigants who will be going into an appeal. Q: Do you that the CCI will focus on other sectors?
A: The next sector that might be the focus of the CCI is the tyre sector. With the order on the cement sector out of the way, the order on tyre companies will be out in the next week or so.
So, tomorrow I am more worried on tyre stocks and the biggest victim of this will be Apollo Tyres due to the kind of run-up in the stock. However in the case of the tyre sector the order will be restricted to very few companies - Apollo Tyres, JK, MRF and Ceat.