No major impact of tribunal order: Analysts

Analysts remain selectively bullish on the stocks from this space

The Competition Appellate Tribunal (Compat) has directed cement companies to pay 10 per cent of the penalty of Rs 6,307 crore imposed on them by the Competition Commission of India (CCI) for cartelisation. In an interim order, the tribunal also clarified the companies’ petition challenging the penalty and the Rs 73-lakh fine imposed on the Cement Manufacturers Association would be dismissed, if they failed to deposit the amount within 30 days.

The cement companies charged with cartelisation include Lafarge India, India Cement, JP Associates, Binani Cement, Ambuja Cement, Madras Cement and J K Cements. According to reports, while ACC, Binani, Lafarge, Ambuja and JK Cements have already presented their arguments before the tribunal, six other companies are yet to do so.

Today, Jaiprakash Associates, Prism Cement, Shree Cement and Dalmia Bharat gained about three per cent each in intra-day trade, while Ambuja Cements, Birla Corporation, Century Textiles and ACC gained one to two per cent on the BSE, in an overall lacklustre market.

Impact
“Cement companies had expected they would be sent back to CCI and there won’t be any penalty. Now, they have to pay a 10 per cent penalty. To that extent, the development comes as a surprise,” said an analyst from a local brokerage tracking the segment. “Overall, I don’t think there are any major concerns regarding the order right now. I believe Compat has tried to strike a balance. While on the one hand it has not shown any favour to cement companies, on the other hand, the CCI order has also been duly acknowledged. This is a neutral order,” he added.

A K Prabhakar, senior vice-president (equity research), Anand Rathi Financial Services, said, “This is just security money, before going on to the next step. The companies haven’t been penalised; this amount would be refunded if they come out clean. This will not have a major impact on any company. However, as a knee-jerk reaction, the stocks could dip, but are likely to bounce back soon.”

Outlook
Despite the development and the possibility of an adverse outcome, analysts suggest from here, the sector could see improvement. With a slight improvement in the demand-and-supply situation this month, manufacturers could raise prices by Rs 5-10 a bag (two to three per cent) month-on-month from the beginning of next month in the northern, central and eastern regions, Karvy Research analyst Rajesh Kumar Ravi said in a recent report. In the southern and western regions, weak demand and high supply pressure persisted, negating any price recovery this month, he added.

He said UltraTech Cement and Shree Cement were his preferred bets in this sector.

“We have a positive view on the cement space and would recommend buying stocks on a decline, even if the final judgment is adverse. Cement companies would benefit from the bottoming out of the economy and a revival in the investment cycle, which is likely after the general elections scheduled for 2014. I expect cement prices and demand to pick up. We like Grasim, UltraTech Cement, J K Cements, besides ACC and Ambuja Cements,” said Prabhakar of Anand Rathi.

However, Kamlesh Bagmar and Mandar Dhavle of Prabhudas Lilladher seem cautious. “Disappointing earnings in the last two quarters were overlooked by investors, in anticipation of a better earnings outlook in the second half of 2013-14, aided by strong pre-election government spending. However, we differ on the demand prospects, given the weak outlook on ex-government consumption (75 per cent of the total demand) and doubts on government spending, coupled with poor demand in all major states slated to hold elections in November,” they said in a report.

“We continue to like Shree Cement, backed by strong earnings outlook and attractive valuations (enterprise value/earnings before interest, tax, depreciation and amortisation at six times the estimated earnings for FY15),” they add.