Is competition watchdog's crackdown on cement makers is justified?
The competition watchdog's crackdown on cement makers is justified, though some say it plays favourites.
The Competition Commission of India (CCI) recently issued orders against 11 cement companies for engaging in anti-competitive practices such as forming a cartel and fixing prices. It penalised them Rs 6,000 crore - half their profits for 2009/10 and 2010/11. This is the highest fine imposed by the competition watchdog, which was set up in 2003 but started accepting cases only about three years ago. CCI, which replaced the Monopolies and Restrictive Trade Practices Commission, is far more powerful. It found that the cement makers operated below capacity to curb supply and raised prices when demand was high.
Most of these companies plan to challenge the CCI orders in the Competition Appellate Tribunal. Still, the impact could be far-reaching. According to Fitch Ratings India, the decision could result in industry consolidation. In a recent report, Fitch notes that the top five companies - UltraTech Cement, Ambuja Cements, ACC, India Cements and Madras Cements - account for over half of total capacity. It notes: "CCI orders limit coordinated supplier actions with respect to price and quantity. Smaller firms with uneconomic cost structures would become uncompetitive and face very significant deterioration in their credit profiles." Rakesh Arora, analyst at Macquarie Capital Securities India, says regulatory interventions will reduce companies' earnings predictability.
Teena Virmani, analyst at Kotak Securities, says CCI has a firm footing in this case, as cement companies pay Rs 3,000 to Rs 3,300 (excluding interest and depreciation) to make a tonne of cement, while average price realisation is around Rs 4,200. She says an EBITDA margin of Rs 900 a tonne is exorbitant. "Even if costs have risen in the past few years, the jump in market prices has been higher," she says. "Capacity utilisation has been kept low by all companies to create an artificial shortage."
This is not CCI's first crackdown. Last year, it fined DLF Ltd Rs 630 crore, saying it abused its leading position to impose unfair conditions on flat buyers. In April this year, it fined United Phosphorous and three other companies, saying they colluded while bidding for a government tender. CCI is expected to issue orders soon on tyre majors, and penalties could be three times their profits.
Industry experts say CCI has been selective. For instance, it failed to take strict action against telecommunications majors last year, when they simultaneously raised call rates by some 20 per cent for prepaid subscribers. And in December 2010, CCI sought government data to probe whether airlines have formed a cartel to raise fares, but took no action despite ample evidence.
Most of these companies plan to challenge the CCI orders in the Competition Appellate Tribunal. Still, the impact could be far-reaching. According to Fitch Ratings India, the decision could result in industry consolidation. In a recent report, Fitch notes that the top five companies - UltraTech Cement, Ambuja Cements, ACC, India Cements and Madras Cements - account for over half of total capacity. It notes: "CCI orders limit coordinated supplier actions with respect to price and quantity. Smaller firms with uneconomic cost structures would become uncompetitive and face very significant deterioration in their credit profiles." Rakesh Arora, analyst at Macquarie Capital Securities India, says regulatory interventions will reduce companies' earnings predictability.
Teena Virmani, analyst at Kotak Securities, says CCI has a firm footing in this case, as cement companies pay Rs 3,000 to Rs 3,300 (excluding interest and depreciation) to make a tonne of cement, while average price realisation is around Rs 4,200. She says an EBITDA margin of Rs 900 a tonne is exorbitant. "Even if costs have risen in the past few years, the jump in market prices has been higher," she says. "Capacity utilisation has been kept low by all companies to create an artificial shortage."
This is not CCI's first crackdown. Last year, it fined DLF Ltd Rs 630 crore, saying it abused its leading position to impose unfair conditions on flat buyers. In April this year, it fined United Phosphorous and three other companies, saying they colluded while bidding for a government tender. CCI is expected to issue orders soon on tyre majors, and penalties could be three times their profits.
Industry experts say CCI has been selective. For instance, it failed to take strict action against telecommunications majors last year, when they simultaneously raised call rates by some 20 per cent for prepaid subscribers. And in December 2010, CCI sought government data to probe whether airlines have formed a cartel to raise fares, but took no action despite ample evidence.
