Urmik Chhaya of Fortune Equity Shareholders and AK Prabhakar, senior vice-president – Equity Research, Anand Rathi discuss the implication of the CCI order on cement companies.
Urmik Chhaya, Fortune Equity Shareholders, says that “according to PIB release the companies have to pay a penalty of 50% of both FY10- FY11. The industry plans to hike the prices to offset the cost, primarily freight and the fuel cost. Industry is entitled to remain profitable.”
AK Prabhakar, senior vice-president – Equity Research, Anand Rathi, says that “the penalty is slightly higher. We expected penalty to be around Rs 5,000 crore. A 3-5% correction in stock tomorrow morning is possible and a good chance to enter these stocks.”
Below is the edited transcript of his interview to CNBC-TV18. Also watch the accompanying video.
Q: How are you reading the CCI order?
Chhaya: The CCI order is yet not available though no question of interpreting it without reading the full order. Basic issue is that the industry is doing what is required to remain profitable.
Q: Part of the order says that there will be no price cuts, cement companies will not increase their utilisation. Current order says that companies have to pay a penalty which is 50% of the FY10 profits. So, how are you reading this from that perspective?
Chhaya:The Press Information Bureau (PIB) release says that 50% of the profit for FY10 and FY11. So, there is serious confusion as to the penalties levied on FY10 and FY11.
The industry plans to hike the prices to offset the cost, primarily freight and the fuel cost. Industry is entitled to remain profitable. So, there is no question of anybody telling industry how to increment the prices unless the product is put under the essential commodities. So, that was never expected. So, I don’t see anything new or negative in that or positive in that for that matter.
Q: Were you expecting the penalties to be around Rs 6,300 crore level from the top 10-11 companies?
Chhaya: I never calculated the penalty as it would be appealed against in the Appellate Tribunal. Till the appeal is disposed off I don’t think there is any requirement for the cement companies to pay the entire penalty or even part of the penalty unless the auditor goes through the order and takes a view on it. It is not clear whether it would be provided for even in P&L, forget about making a payment.
Q: How would you approach cement stocks tomorrow when they open for trade?
Chhaya: This is quite a non-event. The auditor will take a final view if any penalty needs to provided. I don’t think companies are under any compulsion to pay even part of the penalty before opting for appeal to Appellate Tribunal. Post Appellate Tribunal companies will have option of going to the Supreme Court. There will be no material impact on the companies.
Q: How would you be approaching these cement names now?
Prabhakar: The penalty is slightly higher. We expected penalty to be around Rs 5,000 crore. One time payment is not a problem, but if the cement companies lose pricing power that will be a problem going forward.
After 20 years, in the last three years only the cement companies have been outperforming and any adverse impact on them will be very difficult. From 2003 the growth has been 8-10% which is not very big.
A company growing marginally should not be impacted by such order. If there is any adverse for the pricing power I think it will be negative. Otherwise, it is one time and this has been priced in the stock already. There is a possibility that stocks can correct 3-5% tomorrow morning and there is a good chance to enter these stocks.
Q: How will this order impact individual company per share?
Prabhakar: The impact on standalone cement companies will be very less, but for a company which has multiple businesses the impact will be higher. I don’t know how penalty on JP Associate which has multiple businesses will be calculated. In case of JP Associate profit can even turn negative. However, this order can be challenged in court of law. So, I don’t think we have to react much. It is slightly negative but not very negative as of now.
Q: Many cement companies like Ambuja, ACC etc are already sitting on premium valuations of about 15-17 times. You feel that there could be problems with pricing power going ahead with profitability because of this payment, do you continue to see an overhang on the sector and perhaps even a selloff, not just this initial kneejerk selloff, but getting protracted from hereon?
Prabhakar: Yes, currently we are worried but the long term infrastructure growth is intact as they are operating at lower than 75% of the capacity. So, there is scope to increase their capacity utilisation. If they are able to operate at higher capacity then there will not be any pressure on cement stocks. But capacity utilization has come down in the last three years. That is the major problem. Otherwise, these companies can go through. These valuations are justified if there are more infra orders and increase government spending.
(curtsey : money control)
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