CCI order on cement: punishes performers, say analysts

MUMBAI, July 08, 2012: The Competition Commission of India’s recent order on eleven Indian cement companies imposing a whopping Rs 6,000 crore penalty for alleged cartelization is bound to have a crippling the industry – the world’s second largest after China - leading analysts said.

"It's a classic case of performers being punished,” said Mr Sudip Bandyopadhyay, MD and CEO of Destimony Securities. 

“In some cases the penalty imposed is higher than a year’s earning for many players and this could negatively affect the health of the company jeopardizing shareholder interest,” Mr Bandyopadhyay said and wondered: “Penalty seems to have been imposed on circumstantial evidence and not on the basis of concrete proof of cartelization.”

“As it is, the Indian economy is already suffering from negative developments on account of retrospective amendment in the Income Tax laws and the reverberations of the 2G scam. Further, penalties on core sectors like cement will weaken the FII confidence, as well as that of the domestic investor which will go on to hamper growth and destabilize the economy even further," he added.

The Competition Commission of India had imposed penalty of over Rs 6,000 crores on 11 cement manufacturers based on a complaint filed by Builders Association of India. The Commission has also imposed penalty on the Cement Manufacturers Association

In its report titled "CCI bites hard; Industry ready to fight back", Anand Rathi Share and Stock Brokers Limited says the order is largely based on “circumstantial evidence and less concrete or direct evidence” for an industry with a relatively large number of players.

Emkay Global Financial Services Ltd said in its report after analysing the CCI order that “Though some of the evidence presented by CCI could be strong, we believe they may not be strong enough to prove the charge of cartelization.”

“Collection and circulation of data by CMA has been considered as anti-competitive practice. However CMA has argued it collects data under instructions from DIPP for computation of wholesale price index and, hence, no adverse inference can be drawn from this. Further, data collection and dissemination activities of CMA mentioned by CCI are pretty much the activities carried by any trade/business association,” Emkay said.

“We also observe that CCI has provided strong circumstantial and statistical evidence like date and venue of CMA’s ‘High Power Committee’ meeting and subsequent movement in cement prices indicative of coordinate price actions by cement manufactures. However the limited period and price analysis of such meetings and that too for specific season (particularly construction season when cement prices usually witness seasonal up tick) could lead to lot of subjective inference and weakens statistical assessment. For eg .Commission gave instances of CMA meeting held on Jan-11, Feb-11 and April-11 and no specific explanation of why only these three meetings have been referred to when meetings of its High Power Committee take place periodically,” it added.

According to BRIC Data, an emerging markets intelligence company, India is ranked as the second-largest producer of cement in the world, only behind China. The Indian cement industry increased in value at a compound annual growth rate (CAGR) of 13.14% during the review period (2007–2011), and is projected to grow at a CAGR of 10.64% over the forecast period (2012–2016). This growth is primarily attributed to the government’s high level of infrastructure spending, and the country’s increasing number of residential and commercial construction activities, BRIC Data says.

The Indian government invested US$500 billion on infrastructure during the Eleventh Five-Year Plan (2007–2012) and revealed plans to invest a further US$1 trillion on infrastructure during the Twelfth Five-Year Plan (2012–2017).

The large-scale investment on various infrastructure projects, including roads, railways, bridges and ports, will generate a huge demand for cement over the forecast period, BRIC Data says.

Credit rating agency CRISIL said the penalty on the four CRISIL-rated cement companies is unlikely to impact their credit quality. “CRISIL believes that the financial risk profiles of these cement manufacturers are strong enough to offset the impact of the penalty. The penalty is sizeable at 75 per cent of the aggregate net profits of the four rated cement players for 2011-12 (refers to financial year, April 1 to March 31),” the agency said.

CRISIL, however, said robust liquidity and low gearing will cushion the credit risk profiles of these companies against the impact of the penalty. Moreover, cash outflows on account of the order are unlikely immediately, given that the players may appeal against it at the Competition Appellate Tribunal.

“The credit risk profiles of these companies are, therefore, expected to remain unchanged in the near term,” it said.