Follow – up on cement sector update - Geojit BNP Paribas Financial Services

- The CCI has levied a penalty of Rs.6300 crore on 10 cement companies.

- It has also issued a 'cease and desist' order and disallowed the collection and distribution of production, dispatch details and price data by the Cement Manufacturers Association to members.

- It is expected that the pricing power of the industry is negatively impacted if the Competition Appellate Tribunal (COMPAT) and the Supreme Court agree with the CCI's conclusions. This is likely to have a long term impact on the profitability of the sector.

- If the fine levied by CCI is accepted by higher authorities, there would be a potential 2.5% - 4.3% impact on the target prices of cement companies. Individually, the target price of ACC may be impacted 4.3%, Ambuja's TP by 4% that of Ultratech by 2.5% and a 4.1% impact on the target prices of other cement companies.

- The negative EPS impact for FY13/CY12 EPS of these companies may range between 33.7% and 68.8%.

- However, the fine is unlikely to have an immediate impact on EPS as the companies will appeal against the ruling and may obtain a stay order.

- The TP impact appears small in comparison to EPS impact on assumption that the companies may adjust their net debt for the penalty payout instead of EBITDA, as the penalty is a one time and non –recurring payout.

- In addition to companies included in our coverage universe (ACC, Ambuja Cements, Ultratech and India Cement) other cement companies fined include Jaiprakash Associates, Lafarge, Century Textiles, Madras Cement, Binani Cement and JK Cement.

Source : Equity Bulls

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