| Summary of Contents
| SECTOR UPDATE Cement CCI penalty an overhang Key points -
CCI to impose penalty on cement companies: As per media reports, the Competition Commission of India (CCI) is set to pass an order in a day, accusing top cement companies of creating a cartel. According to the CCI officials, a few short-listed cement companies are likely to face a penalty of 8% of their average revenue in the past three years. The order has been signed by all members of the commission but is yet to be signed by its chairman. -
Aditya Birla group to face the highest penalty: In total there were 39 cement companies that are under the CCI scanner; however, only the top 11 by revenue are likely to face penal action of 8% of their average sales in the past three years. If the order is approved by the CCI chairman, then it will affect companies like UltraTech Cement (UltraTech), Ambuja Cements, ACC, JP Associates, India Cements, Madras Cements and Shree Cement. As per the average revenue of the respective companies the highest penalty of about Rs1,025 crore is expected to be imposed on UltraTech. ACC and Ambuja Cements are likely to face a penalty of Rs600 crore to Rs650 crore whereas the other players like JP Associates, India Cements, Madras Cements and Shree Cement may have to face a penalty in the range of Rs300-400 crore. However, the managements of the Aditya Birla group, ACC and India Cements have mentioned that they have not received any correspondence from the CCI. -
Penalty works out to 20-35% of the cash and liquid investments: The cement companies will have to pay the penalty amount either from their cash and liquid investments or by raising debt. Considering the cash and liquid investments of the cement companies, we feel that none of the companies will have to resort to debt to pay the penalty. However, the impact of the penalty on their cash balance will be in the range of 20-35% except for Madras Cements, which shall suffer an impact of as high as close to 70%. -
Impact on India Cements and Madras Cements severe in terms of market cap: The penalty as a percentage of the market capitalisation (market cap) for most of the cement companies on the penalty list is in the range of 2.5-3.0% except for India Cements and Madras Cements, which shall face the highest penalty. The penalty on India Cements works out to close to 12% of its current market cap and that for Madras Cements works out to 6% of its current market cap. -
Impact of penalty on FY2013 estimated profit in range of 35-95%: Though the impact of the penalty on the market cap of the cement companies does not seem severe, but the impact of the same on our earnings estimate for FY2013 appears to be much severe and in the range of 35-95%. The companies with the highest impact on the FY2013E earnings include India Cements (an impact of 97%) and Shree Cement (an impact of 81%). Outlook
We believe the cement companies shall challenge the CCI order (likely to be announced in a day) in the court. However, any penalty imposed by the CCI will be a negative for the cement companies particularly for India Cements, Madras Cements and Shree Cement (as per the earnings impact).
We maintain our neutral stand on the sector as we believe the positives in terms of a partial recovery in the demand environment and a better realisation are likely to support the revenue growth of the companies but cost pressure, a likely correction in the realisation and the penalty burden could be the key concerns for the earnings of the cement companies. However, we are selectively positive on Grasim Industries in the large-cap space and Orient Paper & Industries in the mid-cap space. Fertilisers Normal monsoon to drive growth Key points Government defers urea price hike: The government has deferred the fertiliser ministry's proposal to hike the retail price of urea by 10% to Rs5,841 per tonne for FY2013. Urea is the only fertiliser that remains under the government's full control. Its current retail price is Rs5,310 per tonne. The proposal to hike urea prices was made to redress the imbalanced use of soil nutrient and to reduce the subsidy burden of the government. In 2011-12, indegenious urea and imported urea contributed Rs20,300 crore and Rs17,475 crore respectively to the fertiliser subsidy bill. The government's decision not to increase the price of urea will not affect the financials of the urea manufacturers because any increase in the variable cost shall be fully compensated by the government as urea is still under government control. 30 to 60% increase in prices of complex fertilisers: Non-urea fertiliser companies have resorted to massive rate hikes in all other nutrient products for the current kharif planting season. Non-urea fertiliser companies will increase the price of complex fertilisers due to a cut in the subsidy pay-out by the government and the depreciation in the rupee which has increased the cost of the imported raw materials such as phosphoric acid, diammonium phosphate (DAP) and Muriate of Potash (MOP). The new prices are technically effective from June 1, 2012. However, farmers would not have to pay these rates for the stocks that have been already dispatched to dealers. The stock of non-urea fertilisers is expected to last till the end of July 2012. The total quantity in stock is estimated at about 5.5 million tonne (mt) including 2.5mt of DAP, 1mt of MOP, 2mt of single super phosphate (SSP) and various other complex fertilisers. A steep increase in the price of non-urea fertilisers and the unchanged price of urea have increased the difference between the prices of urea and non-urea fertilisers which may affect the demand for the non-urea fertilisers adversely, thereby spurring the demand for urea in the short term. However, in longer run demand for non-urea fertiliser is expected to be strong. Monsoon to remain key monitorable for demand: The India Meteorological Department (IMD) has forecast a normal monsoon for India in FY2013. This will increase the demand for fertilisers in the kharif season. The June-September monsoon season accounts for 85% of the total annual rainfall in the country and is crucial for India's largely rain-fed kharif crops. Apart from a timely arrival of the monsoon, the spread of the rainfall also matters. The spread and distribution of the rainfall will be the key monitorables rather than just the timely arrival of the monsoon. A random and ill-distributed rainfall may hurt the agri production as well as the fertiliser demand. Any delay in the arrival of the monsoon or an inadequate rainfall due to El Nino expected in August 2012 may affect the demand for fertilisers. Government increases MSP for all major crops: The Cabinet Committee on Economic Affairs has approved the minimum support prices (MSPs) for kharif crops of the 2012-13 season. The MSP of paddy (common) has been fixed at Rs1,250 per quintal and that of paddy (Grade A) at Rs1,280 per quintal. This represents an increase of Rs170 per quintal over the last year's MSPs. The higher MSPs as compared with the last year's MSPs for all major crops will motivate farmers to improve their yield which will ultimately drive the demand for fertilisers. Outlook: A 20 to 30% increase in the MSPs will motivate farmers for better yield which will support the consumption of the fertilisers in FY2013. In addition, the forecast of a normal monsoon also augurs well for the demand. Hence, we believe that the volume growth of the fertiliser companies in FY2013 will be better as compared with that in FY2012 (a 6% growth in FY2012). Further, on the valuation front companies like Coromandel Fertilisers, Chambal Fertilisers and GSFC are trading at a discount to their mean valuation which leaves room for an upside. At the current market price Chambal Fertilisers, Coromandel Fertilisers and GSFC are trading at 8.4x, 8.63x and 4.7x to their respective FY2014 consensus earnings estimates. However, the depreciation in the rupee and a sub-normal monsoon could be the key concerns for the sector.
Click here to read report: Investor's Eye | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article. | | | | | |
