How cement companies may react to news of cartelisation
Sharekhan has come out with its report on cement sector. Cement majors have come under SFIO scanner for investigating cartelization.
June 21, 2011 / 12:13 PM IST
Sharekhan has come out with its report on cement sector.
Cement majors come under SFIO scanner for investigating Cartelization: The Serious Fraud Investigation Office (SFIO) is investigating allegations of cartelisation against cement majors UltraTech Cement (UltraTech), Ambuja Cements and ACC. The SFIO is acting under the directions of the corporate affairs ministry, which is its nodal ministry. The investigation will examine the conduct of the cement companies over a ten-year period. UltraTech and Ambuja Cements confirmed that an investigation is being carried out by the SFIO and that the companies have already provided information and documents. As per government norms there could be heavy penalty on cartelisation by players but historically none of the players has paid penalty in the event of such investigation. However, sentimentally the event is negative for the sector and hence the share price of most of the cement players has corrected and underperformed the broader market after the announcement. Cement majors like Ambuja Cements, ACC and UltraTech have corrected by 6.7%, 4.5% and 4% respectively in the last couple of days.
To understand the impact of the recent development we have analysed a similar past event:- In 2007, cement manufacturers were under MRTPC scanner: The trade practices regulator, Monopolies and Restrictive Trade Practices Commission (MRTPC), on July 29, 2007 had ordered an investigation into the business practices of 14 leading cement manufacturers that were alleged to have colluded to increase cement prices. The commission had issued notices of inquiry against these companies after its investigative wing, the Director General of Investigation and Registration (DGIR), had submitted a preliminary report on the matter. The DGIR had concluded that the price hikes were over Rs50 for a 50kg bag between April 2005 and March 2006, much higher than the rise in the cost of production.
Impact on share price: The performance of the shares of the leading cement companies from the date of the announcement of the investigation was as follows.
In 2008, cement firms had come under scanner for violation of weight and price: On April 26, 2008 various cement manufacturing companies (around 16) and cement dealers had come under scanner for the violation of standard weights and improper display of prices. The inspections had revealed that several cement companies had violated the Packaged Commodities Rules and Standards of Weights and Measures (Enf) Act 1985 and the weight of cement per bag was below the permissible levels. They had also been accused of displaying improper prices.
The performance of the shares of the leading cement companies from the date of the announcement of the investigation was as follows. We also interacted with the cement companies, regional players and dealers to obtain their views on the development. The key takeaways from our interactions are presented below.
Interaction with the leading cement companies: Past investigations did not affect cement prices:-
UltraTech: The management has confirmed that it has received certain queries as part of an investigation of the alleged cartelisation. In response to the queries raised by the investigation body, the company has submitted the requisite documents. As per the management, the government