Asia / Oceania
Price-fixing allegations stir up M&A activity
Jun, 29 2012
(Mumbai, India) -- The penalties imposed by the Competition Commission (CCI) last week on the 10 largest Indian cement producers for alleged price fixing is likely to impact margins of cement companies and may lead to mergers and acquisitions in the sector, said leading credit rating agencies.
A report released by Moody’s Investors Service on Monday said the verdict by CCI is credit negative for Switzerland-based cement producer Holcim and to a lesser extent for France-based Lafarge. “We believe that indirect credit consequences from CCI’s decision will outweigh the cash effect of the fines on both Holcim and Lafarge. Holcim and Lafarge have been able to compensate for some of the cost inflation in India through price increases, but the CCI ruling and increased scrutiny of cement prices are likely to make it much more difficult for these two players to increase prices and maintain their current margins,” said the report.
Holcim group India’s largest cement producer owns majority stake in the ACC (50.3 per cent) and Ambuja Cements (50.13 per cent). ACC controls 10.4 per cent of the Indian cement market according to CCI, while Ambuja Cements controls 9.8 per cent. ‘Holcim fully consolidates the two companies into its accounts. Lafarge is a much smaller player, with a 3.2 per cent market share,’ said the report.
A spokesperson in Ambuja Cements said, “Margins of cement companies are being impacted because of oversupply situation as cement companies anticipated increased demand driven by more investments in infrastructure sector. Also the input costs of cement companies and transportation costs have escalated.”
He added that, “We are fighting out the CCI decision and will approach the Competition Appellate Tribunal.” A spokesperson from ACC declined to comment on the report. Lafarge did not respond to an email query from this paper seeking comment till late evening on Monday.
‘For Holcim, the fine (Rs 2,310 crore) is two per cent of adjusted debt and 15 per cent of the group’s retained cash flow for the last 12 months ended March 31, while for Lafarge the fine (Rs 480 crore) is 0.4 per cent of its adjusted debt and five per cent of retained cash flow. Both issuers currently enjoy above-average operating margins in India compared with the rest of their international operations,’ said Moody’s.
Cement producers have 90 days from the date of the ruling to pay the fine but 60 days to appeal both the ruling and the size of the penalty. An appeal is likely to delay the payment of the penalty as the case will be brought to the high court and could also lead to lower cash charges. ‘We do not think that Holcim will need to recapitalise ACC and Ambuja because these two entities have very healthy balance sheets with very little debt, and equity capital covers respectively 6.3x and 6.9x the amount of the penalty,’ said the Moody’s report.
A Fitch Ratings India report also released on Monday said that the order passed by the CCI against alleged coordinated supplier actions might aid the process of further consolidation in the industry over the long term.
“The cement industry in India is unique, with 57 per cent of the capacity being consolidated with the top eight players. The rest of the industry is highly fragmented, with small-to-medium sized companies mostly with uneconomical size of operations. To the extent regulatory intervention limits coordinated supplier actions with respect to price and quantity, smaller firms with uneconomic cost structures would become uncompetitive and face very significant deterioration in their credit profiles. As such the fragmentation level in the industry is expected to reduce and larger and vertically integrated companies are likely to gain market share,” said Fitch.
The agency has maintained a negative outlook on the Indian cement industry for the last two years as the industry has been struggling with excess capacity and has a structural feature of relatively high operating leverage. ‘The top five companies: UltraTech Cement, Ambuja Cements, ACC, India Cements and Madras Cements, constituting around 50 per cent of the industry capacity enjoy a better cost structure, driven by higher level of vertical integration and locational advantage with respect to sourcing of raw materials and market access. Most other players have a weaker cost structure and moderately high leverage levels (an industry median value of around 4x). Globally, most markets have significant consolidation and this move by CCI may indirectly help the Indian cement industry in correcting this structural imbalance,’ said the Fitch report.
By: Jharna Mazumdar
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