CCI order on cement cos: Could it be a buying opportunity?
The focus will be on cement stocks today as the Competition Commission of India (CCI) is expected to announce the penalty for key companies in the sector for manipulating prices by forming a cartel.
June 20, 2012 / 13:25 IST
Moneycontrol Bureau
The focus is on cement stocks today as the Competition Commission of India (CCI) is expected to announce the penalty for key companies in the sector for manipulating prices by forming a cartel. Shares of ACC, Ambuja Cements, Ultratech and India Cements were down between 2% and 3% in early trade.There are different estimates of the impending penalty in the media, with some reports suggesting that the penalty may not be huge as cement is a key input for infrastructure. The regulator has the power to fine as much as 8% of the average turnover of the last three years, says a CNBC-TV18 report. To some extent, cement stocks have priced in the likely damage of an adverse CCI verdict to their bottomlines. Still, the stocks could tumble further once the order is issued. Would that be a good opportunity to buy into key cement stocks? Brokerage house JP Morgan does not think so.This is what JP Morgan cement analysts told clients in their morning note today. "One of the bull arguments has been that cement equities would be a buy post any eventual CCI order as it would remove the overhang on the sector. In our view, this argument assumes that the CCI event would be the last regulatory issue. The reason we refrain from pushing the large-cap stocks aggressively at current valuations is our concern that the CCI order has the potential to worsen things further. Limestone royalties are up for revision, Coal India’s coal production has many claimants, Railways used to have a very steep differential freight tariff for iron ore exports. Most worrying and watched issue would be the impact on current cement pricing, and whether there would be pressure to roll back cement price hikes and limit them in the near future."And Deutsche Bank has a diametrically opposite view."Any weakness, on back of this newsflow, could provide a good buying opportunity. Though there are concerns on the pricing power of the industry."Why? "Firstly based on prior orders of CCI, the companies are not required to pay penalties before appealing in Appellate tribunal /Supreme Court. Secondly after order is made available, auditors of individual companies would decide, whether liabilities need to be provided for or treat the entry as contingent liability. At this juncture, any cash flow impact is unlikely."Besides, there are fundamental reasons as well, argues Deutsche Bank."Though there are concerns on the pricing power of the industry, given strong demand; Indian subsidaries of global MNC cement majors pushing back new capex; and domestic players with high debt looking for asset sale and no capex; we are of the view that emerging natural pricing power from tight demand-supply environment would more than offset any cost push."And finally some cold comfort for investors in cement companies.Here is what brokerage house IIFL has to say about the recent trend in cement prices, in its report on Tuesday:*Improved availability of sand and labour, a good harvest, and delay in the onset of monsoon have boosted construction and cement demand in central and northern regions in the current month, according to dealers.*Cement prices have rebounded in the central, eastern and northern regions in the past two weeks; dealers stated that producers have indicated further price increases in coming weeks. Prices have eased in a few parts in the southern and western regions due to fight for market share and onset of the monsoon.*All-India average price is flat month-on-month but 17% higher year-on-year. We expect cement prices to be on a declining trend during the monsoon season and improve thereafter; we expect margins to improve YoY for 1QFY13 due to strong prices YoY. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
