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CCI Verdict – Decidedly Circumstantial!

Published

12 years ago

June 30, 2012

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The Competition Commission of India recently imposed heavy penalties on 10 major cement companies in India on charges of indulging in cartelisation. A look at the ramifications of the CCI decision.On June 20, 2012, in a first-of-its kind order, the Competition Commission of India found 11 cement companies guilty of cartelisation and imposed a penalty at the rate of 0.5 times of their profit for the year 2009-10 and 2010-11 for violation under Section 3 of the Competition Act, 2002. The total profit of these companies for financial year 2009-2010 was about Rs 12,632 crore and the CCI penalty amounted to Rs. 6,306.59 crore. Additionally, the CMA was also fined Rs 73 lakh for providing a ‘platform’ to the cement companies and facilitating cartelisation, which is 10 per cent of its total receipts for these two years.The decision of the CCI came on a plea filed by the Builders Association of India alleging that cement manufacturers have formed a cartel to fix the commodity’s retail prices at almost similar levels. There were also charges of these companies reducing production to inflate prices. In June 2010, acting on a complaint filed by the Builders Association of India (BAI), the Competition Commission of India (CCI) probed the cement industry in India for evidence of collusive behaviour. It is important to note that the DG restricted himself to the 10 cement companies named, owing to the fact that such companies were the prominent participants in the market and the key players in this whole arrangement. The DG limited the period of contravention from 20 May 2009 to 31 March 2011.According to the BAI, although the Government had issued various concessions and tax subsidies along with petrol and diesel reductions, cement companies through an agreement, caused an increase of Rs 5 per bag between December 2008 and February 2009.No dominant playerIn its observations the DG found that as per the prevailing market structure, no player can be said to be dominant. The Indian cement industry is dominated by twelve cement companies having about 75 per cent of the total capacity with about 21 companies controlling about 90 per cent market share in terms of capacity. From this, the CCI deduced that collusion between companies is possible and can be adduced from circumstantial evidence. The lack of direct evidence was the chief objection taken by the cement companies. However, the DG noted that circumstantial evidence is of no less value than direct evidence to prove cartelisation. The CCI held that the cement companies interacted using the CMA as a platform, which gave them an opportunity to determine and fix prices. Further, the CCI noted that the CMA published factory wise production and despatch statistics of each company and circulated such information amongst its members. This collation and sharing of price, production and despatch data was sensitive and made co-ordination easier amongst the cement companies.Price, production and despatch parallelismAfter conducting an economic analysis of price data, the CCI noted that there was a positive correlation in the prices of all companies. Similarly, the production figures across cement companies (in a particular geographical region) showed strong positive correlation. Additionally, it was observed that the despatches made by the cement companies were almost identical for the period from January 2009 to December 2010. The cement companies argued that the parallelism in both production and despatch is on account of the commoditised nature of cement, the cyclical nature of the cement industry and the ability of competitors to intelligently respond to the actions of their competitors. The CCI rejected these arguments and stated that given the nature of data exchanged between the parties, parallelism could not be a reflection of non-collusive oligopolistic market conditions.Limiting and controlling production, supply and priceIn the order, the CCI suggested that whilst cement manufacturers increased capacity utilisation during the last four years, their production has not increased commensurately. This "deliberate act" of shortage in production and supply by the cement companies and almost inelastic nature of demand of cement in the market resulted into higher prices for cement.However, the cement companies, which have always denied charges of cartelisation, are expected to approach the appellate tribunal to appeal against a penalty. Indian Cement Review sought reaction from cement companies on the penalty levied by CCI, but none of the cement companies responded to calls and emails. However, a spokesperson of a large cement company under condition of anonymity said, "We are in the process of reviewing the CCI order and we will take suitable course of action in due course of time. We operate under our code of ethical practices and do not indulge in cartelization." In tersely-worded identical press releases to the media, Ambuja Cements clarified saying "ACL contests the allegations and findings against the company. ACL will appeal against this order to the Appellate Tribunal and will seek a stay on the aforesaid penalty," while ACC stated that "We feel aggrieved by this order and will appeal against it before the Competition Appellate Tribunal." Also, Anil Singhvi, former managing director, Gujarat Ambuja Cements, said "It is very hard to believe that there can be a very effective cartelisation for a very long period in cement industry which has about 45 to 50 players. I can understand for a couple of months it can work, but finally the competitive forces work."The BAI Trustee D L Desai, who spearheaded the case against the cement companies justified the penalty saying "the provision for penalty is three times the net profit for the year, but the CCI has imposed just 0.5 per cent of the net profit for two years, so it’s a proper penalty." Speaking about evidence of cartelisation, Desai said, "While the installed capacity of cement companies increased every year, the capacity utilisation was decreasing and the cement prices were increasing. If the cement demand was rising, why was capacity utilisation decreasing? Also, the cement prices were moving in similar range across the country." Desai pleaded for reasonableness on the part of cement companies, stating "The cement companies are not in the business for charity, they are in the business for profit. They should make reasonable profit, but they should not indulge in profiteering."Balbir Singh, partner, DSK Legal, commented on the cartelisation issue saying "It’s a path-breaking order but I do expect a series of litigations to follow. It’s clear that institutions like SEBI and CCI are no-nonsense bodies and have a wider responsibility. But our cement companies lack the balance sheet strength of many of their Western counterparts."Cement companies in India have witnessed dramatic growth facilitated by the decontrolling of the sector in 1989, the same year the Cement Manufacturers’ Association was established. Almost from the time the sector has been decontrolled, it has been under the scrutiny of the government for ‘acting in concert’ or the formation of cartels. The first accusation of cartelisation of the cement industry came in 1991 by the Monopolies and Restrictive Trade Practices Commission. The cement companies then denied all allegations stating that the sudden price increase was due to the increase in cost of manufacture.What next?The penalty imposed by CCI will dent the financials of cement companies, hence the companies are bound to challenge the CCI order in the appellate tribunal and in the courts. After all, the cement companies are not going to pay up without a fight considering that the penalties imposed would hit them hard. The CCI has relied on circumstantial evidence which may or may not corroborate actual facts. It remains to be seen whether the circumstantial evidence relied upon by the CCI stands the scrutiny of the tribunal and/or the courts. Whatever be the outcome of the case, it is certain that the cement companies would henceforth remain wary of the developers’ bodies closely monitoring their goings-on and correlating the cement price movement and the capacity utilisation of cement manufacturers.

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Price hikes, drop in input costs help cement industry to post positive margins: Care Ratings

Published

3 years ago

October 21, 2021

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Region-wise,the southern region comprises 35% of the total cement capacity, followed by thenorthern, eastern, western and central region comprising 20%, 18%, 14% and 13%of the capacity, respectively.

The cement industry is expected to post positive margins on decent price hikes over the months, falling raw material prices and marked drop in overall production costs, said an analysis of Care Ratings.

Wholesale and retail prices of cement have increased 11.9% and 12.4%, respectively, in the current financial year. As whole prices have remained elevated in most of the markets in the months of FY20, against the corresponding period of the previous year.

Similarly, electricity and fuel cost have declined 11.9% during 9M FY20 due to drop in crude oil prices. Logistics costs, the biggest cost for cement industry, has also dropped 7.7% (selling and distribution) as the Railways extended the benefit of exemption from busy season surcharge. Moreover, the cost of raw materials, too, declined 5.1% given the price of limestone had fallen 11.3% in the same aforementioned period, the analysis said.

According to Care Ratings, though the overall sales revenue has increased only 1.3%, against 16% growth in the year-ago period, the overall expenditure has declined 3.2% which has benefited the industry largely given the moderation in sales.

Even though FY20 has been subdued in terms of production and demand, the fall in cost of production has still supported the cement industry by clocking in positive margins, the rating agency said.

Cement demand is closely linked to the overall economic growth, particularly the housing and infrastructure sector. The cement sector will be seeing a sharp growth in volumes mainly due to increasing demand from affordable housing and other government infrastructure projects like roads, metros, airports, irrigation.

The government’s newly introduced National Infrastructure Pipeline (NIP), with its target of becoming a $5-trillion economy by 2025, is a detailed road map focused on economic revival through infrastructure development.

The NIP covers a gamut of sectors; rural and urban infrastructure and entails investments of Rs.102 lakh crore to be undertaken by the central government, state governments and the private sector. Of the total projects of the NIP, 42% are under implementation while 19% are under development, 31% are at the conceptual stage and 8% are yet to be classified.

The sectors that will be of focus will be roads, railways, power (renewable and conventional), irrigation and urban infrastructure. These sectors together account for 79% of the proposed investments in six years to 2025. Given the government’s thrust on infrastructure creation, it is likely to benefit the cement industry going forward.

Similarly, the Pradhan Mantri Awaas Yojana, aimed at providing affordable housing, will be a strong driver to lift cement demand. Prices have started correcting Q4 FY20 onwards due to revival in demand of the commodity, the agency said in its analysis.

Industry’s sales revenue has grown at a CAGR of 7.3% during FY15-19 but has grown only 1.3% in the current financial year. Tepid demand throughout the country in the first half of the year has led to the contraction of sales revenue. Fall in the total expenditure of cement firms had aided in improving the operating profit and net profit margins of the industry (OPM was 15.2 during 9M FY19 and NPM was 3.1 during 9M FY19). Interest coverage ratio, too, has improved on an overall basis (ICR was 3.3 during 9M FY19).

According to Cement Manufacturers Association, India accounts for over 8% of the overall global installed capacity. Region-wise, the southern region comprises 35% of the total cement capacity, followed by the northern, eastern, western and central region comprising 20%, 18%, 14% and 13% of the capacity, respectively.

Installed capacity of domestic cement makers has increased at a CAGR of 4.9% during FY16-20. Manufacturers have been able to maintain a capacity utilisation rate above 65% in the past quinquennium. In the current financial year due to the prolonged rains in many parts of the country, the capacity utilisation rate has fallen from 70% during FY19 to 66% currently (YTD).

Source:moneycontrol.com

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Wonder Cement shows journey of cement with new campaign

Published

3 years ago

October 21, 2021

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The campaign also marks Wonder Cement being the first ever cement brand to enter the world of IGTV…

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Cement manufacturing company Wonder Cement, has announced the launch of a digital campaign ‘Har Raah Mein Wonder Hai’. The campaign has been designed specifically to run on platforms such as Instagram, Facebook and YouTube.

#HarRaahMeinWonderHai is a one-minute video, designed and conceptualised by its digital media partner Triature Digital Marketing and Technologies Pvt Ltd. The entire journey of the cement brand from leaving the factory, going through various weather conditions and witnessing the beauty of nature and wonders through the way until it reaches the destination i.e., to the consumer is very intriguing and the brand has tried to showcase the same with the film.

Sanjay Joshi, executive director, Wonder Cement, said, "Cement as a product poses a unique marketing challenge. Most consumers will build their homes once and therefore buy cement once in a lifetime. It is critical for a cement company to connect with their consumers emotionally. As a part of our communication strategy, it is our endeavor to reach out to a large audience of this country through digital. Wonder Cement always a pioneer in digital, with the launch of our IGTV campaign #HarRahMeinWonderHai, is the first brand in the cement category to venture into this space. Through this campaign, we have captured the emotional journey of a cement bag through its own perspective and depicted what it takes to lay the foundation of one’s dreams and turn them into reality."

The story begins with a family performing the bhoomi poojan of their new plot. It is the place where they are investing their life-long earnings; and planning to build a dream house for the family and children. The family believes in the tradition of having a ‘perfect shuruaat’ (perfect beginning) for their future dream house. The video later highlights the process of construction and in sequence it is emphasising the value of ‘Perfect Shuruaat’ through the eyes of a cement bag.

Tarun Singh Chauhan, management advisor and brand consultant, Wonder Cement, said, "Our objective with this campaign was to show that the cement produced at the Wonder Cement plant speaks for itself, its quality, trust and most of all perfection. The only way this was possible was to take the perspective of a cement bag and showing its journey of perfection from beginning till the end."

According to the company, the campaign also marks Wonder Cement being the first ever cement brand to enter the world of IGTV. No other brand in this category has created content specific to the platform.

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In spite of company’s optimism, demand weakness in cement is seen in the 4% y-o-y drop in sales volume. (Reuters)

Published

3 years ago

October 21, 2021

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Cost cuts and better realizations save? the ?day ?for ?UltraTech Cement, Updated: 27 Jan 2020, Vatsala Kamat from Live Mint

Lower cost of energy and logistics helped Ebitda per tonne rise by about 29% in Q3
Premiumization of acquired brands, synergistic?operations hold promise for future profit growth Topics

UltraTech Cement
India’s largest cement producer UltraTech Cement Ltd turned out a bittersweet show in the December quarter. A sharp drop in fuel costs and higher realizations helped drive profit growth. But the inherent demand weakness was evident in the sales volumes drop during the quarter.

Better realizations during the December quarter, in spite of the 4% year-on-year volume decline, minimized the pain. Net stand-alone revenue fell by 2.6% to ?9,981.8 crore.

But as pointed out earlier, lower costs on most fronts helped profitability. The chart alongside shows the sharp drop in energy costs led by lower petcoke prices, lower fuel consumption and higher use of green power. Logistics costs, too, fell due to lower railway freight charges and synergies from the acquired assets. These savings helped offset the increase in raw material costs.

The upshot: Q3 Ebitda (earnings before interest, tax, depreciation and amortization) of about ?990 per tonne was 29% higher from a year ago. The jump in profit on a per tonne basis was more or less along expected lines, given the increase in realizations. "Besides, the reduction in net debt by about ?2,000 crore is a key positive," said Binod Modi, analyst at Reliance Securities Ltd.

Graphic by Santosh Sharma/Mint
What also impressed analysts is the nimble-footed integration of the recently merged cement assets of Nathdwara and Century, which was a concern on the Street.

Kunal Shah, analyst (institutional equities) at Yes Securities (India) Ltd, said: "The company has proved its ability of asset integration. Century’s cement assets were ramped up to 79% capacity utilization in December, even as they operated Nathdwara generating an Ebitda of ?1,500 per tonne."

Looks like the demand weakness mirrored in weak sales during the quarter was masked by the deft integration and synergies derived from these acquired assets. This drove UltraTech’s stock up by 2.6% to ?4,643 after the Q3 results were declared on Friday.

Brand transition from Century to UltraTech, which is 55% complete, is likely to touch 80% by September 2020. A report by Jefferies India Pvt. Ltd highlights that the Ebitda per tonne for premium brands is about ?5-10 higher per bag than the average (A cement bag weighs 50kg). Of course, with competition increasing in the arena, it remains to be seen how brand premiumization in the cement industry will pan out. UltraTech Cement scores well among peers here.

However, there are road bumps ahead for the cement sector and for UltraTech. Falling gross domestic product growth, fiscal slippages and lower budgetary allocation to infrastructure sector are making industry houses jittery on growth. Although UltraTech’s management is confident that cement demand is looking up, sustainability and pricing power remains a worry for the near term.