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CCI penalises cement companies yet again!

Published

8 years ago

February 28, 2017

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Cement companies have been at the centre of controversy over the price of cement. Top industry players are facing a couple of cases related to alleged cartelisation and price-rigging.

In what may be yet another blow to the big players of the Indian cement industry, the Competition Commission of India (CCI), on January 19, 2017, penalised certain cement companies for violation of provisions of the Competition Act, 2002 (Act). An enquiry was initiated pursuant to a reference made to the CCI for alleged rigging of bids submitted pursuant to a tender issued by the Director, Supplies & Disposals, Haryana (Haryana Authority) in August 2012.

The said tender was issued for the purpose of supply of cement to various government/boards/corporations in the State of Haryana and the conduct of certain bidders had resulted in the cancellation of the said tender. Aggrieved, the Haryana Authority approached the CCI and filed a reference against (i) Shree Cement Limited, (ii) UltraTech Cement Limited, (iii) Jaiprakash Associates Limited, (iv) JK Cement Limited, (v) Ambuja Cements Limited, (vi) ACC Limited and (vii) JK Lakshmi Cement Limited (collectively ‘Cement Companies’).

Readers may recall that CCI had re-imposed penalties, vide its order dated August 31, 2016, at the rate of (i) 0.5 per cent of the profit of certain cement manufactures for the years 2009-2010 and 2010-2011, and (ii) 10 per cent of the total receipts for two years on the Cement Manufacturers’ Association (CMA), for violation of section 3(3)(a) and 3(3)(b) of the Act (Cartelisation Case). The above penalty was levied by CCI upon concluding that the cement manufacturers had acted in concert to fix cement prices and limit and control the production and supply of cement. However, several of the cement companies and the CMA have appealed the CCI order before the Competition Appellate Tribunal (COMPAT).

In the recent bid-rigging matter, the Director-General conducting the investigation (DG) inter alia found instances of (i) bid rigging and that the Cement Companies were not competing with each other in the year 2012; (ii) difference in the basic rates quoted by each of the Cement Companies for supply at different destinations and the same destination which according to the DG was possible by back calculation of price from the final tendered price of each destination; and (iii) the Cement Companies were acting in tandem and that there was a meeting of minds of the officials representing the Cement Companies. The DG also examined the correspondence between the officials of the Cement Companies including calls on telephone/mobile phones and mobile text messages and concluded that the Cement Companies are in contravention of the provisions of the Act. The Cement Companies, while denying all the allegations inter alia, made the following objections:

(i)The DG wrongfully employed wholesale price index as a tool for measuring the increase in bid prices;
(ii)There was no settled formal pricing formula for calculating the bid price;
(iii)The DG’s investigation was faulty and lacked in-depth investigation and further that there was no adverse effect on competition in India; and
(iv)Disputed the statistics quoted by the DG.

The CCI determined the following issues for consideration:
(i)Whether the bid prices quoted by the Cement Companies were unusually higher than the bid prices quoted in the previous bids and whether such prices were arrived at independently by each of the Cement Companies;
(ii)Whether the lower quantities quoted by the Cement Companies were due to an arrangement to divide the total quantity among the Cement Companies to allocate the markets and whether the bid quantities were arrived at independently by each of the Cement Companies;
(iii)Whether the Cement Companies have in fact divided the market to secure the lowest bidder position; and
(iv)Whether the call details of the officials of the Cement Companies point towards a prior arrangement among the Cement Companies.
The CCI has held that the Cement Companies have failed to provide any material, on the basis on which the Cement Companies have quoted their respective bid prices. It also noted certain consistent and uniform price differences in the quoted price of all the Cement Companies as opposed to their respective previous bids to tenders in the previous years. The CCI observed that all those details are not consistent with the conduct in case they were competing with each other in a free and competitive market.
The CCI observed that in majority of the categories of bids, only a single cement company emerged as the lowest bidder which is significantly different from the pattern of the bid results for the previous tenders in 2008, 2010 and 2011, in which all the Cement Companies participated. The CCI also observed that all the Cement Companies were the lowest bidders in some or other destination, and none of the Cement Companies have failed to obtain a bid. The CCI also observed that Birla Corp and Cement Corp (not a party to the instant case) have not reduced the quantity in the bids from their previous years and unlike the Cement Companies, their behaviour did not undergo a change in the August 2012 tender.

Further, in this case, CCI upheld that the definition of ‘agreement’ under the Act is an inclusive and not an exhaustive one, and that the standard of proof required proving an understanding or an agreement would be on the basis of ‘preponderance of probabilities’ and not ‘beyondreasonable doubt’. In case of ‘agreements’ as per the section 3(3) of the Act, once it is established that an agreement exists, it will be presumed that the agreement has an ‘appreciable adverse effect on competition’ and the onus to rebut the presumption would lie upon the defendants. CCI noted that in the instant case, the Cement Companies failed to rebut the said presumption. In the Cartelisation Case, the CCI, while imposing a penalty of Rs 6,714 crore, noted the action of the Cement Companies and CMA as being not only detrimental to the interests of consumers, but also as detrimental to the whole economy, as cement is a critical input in the construction and infrastructure industry and is thus vital for the economic development of the country. It can be observed that a higher amount has been levied in the Cartelisation Case due to the pernicious effect emanating out of the cartel and its impact on consumers. In the instant bid-rigging case, the CCI, while passing its order, noted that competition law disapproves even the agreements which are ‘likely’ to cause ‘appreciable adverse effect on competition’.

However, while quantifying penalties, a distinction would have to be made between the agreements which actually cause appreciable adverse effect on competition and the agreement which are likely to cause such effects. Hence, in the instant bid-rigging case, CCI passed an order levying a penalty of 0.3 per cent of the past three financial years’ average turnover of each of the Cement Companies amounting to Rs 205.73 crore.

By undertaking a perusal of most of the orders of the antitrust watchdog, it can be observed that the CCI generally takes into account inter alia the statistical data of the relevant years, past behaviour of the relevant entities, the general market circumstances of the relevant industry, etc., while determining the culpability of an enterprise under the Act. In the process, the CCI may uncover the nexus between various industry participants.

The companies need to be cautious that any transaction that they enter into or any arrangements/collaboration etc., with other entities in the same level of the production chain and/or with entities in different levels of a production chain and/or with any kind of association/forum/cooperative society etc., does not fall within the ambit of anti-competitive behaviour and/or abuse of dominant position as provided in the Act.

As reiterated by the CCI, it may also be prudent for market players to develop an intensive and robust competition law programme to create awareness and impart to their employees, appropriate training in competition law compliance and assessment of their business dealings and practices.

The article has been authored by Ashish Parwani, Partner, Rajani Associates. Co-authored by Yogesh M. Nayak, Associate, Rajani Associates.

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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.