Stock Fundamentals

Cement makers face CCI whip

BL RESEARCH BUREAU | Updated on June 23, 2012 Published on June 23, 2012



The Competition Commission of India (CCI) has imposed a penalty of nearly Rs 6,300 crore on 11 cement companies and the Cement Manufacturers Association.

The companies penalised were ACC, Ambuja Cements Limited, Ultratech Cements, Grasim Cements now merged with Ultratech Cements, JK Cements, India Cements, Madras Cements, Century Cements, Binani Cements, Lafarge India and Jaypee Cements. The stocks of these companies shed between 1 and 4 per cent on Friday.

The penalty was computed at 50 per cent of the profits of these companies for the financial year 2010 and 2011 and was much higher than the amount anticipated by the market. The penalty amount was in the range of Rs 129 crore to Rs 2312 crore.

The CCI said that these companies did not utilise the capacities available so that they could reduce supply and keep prices high. Such an act was held to be detrimental not just to consumers but also to the economy as a whole, since cement is a critical raw material for construction and infrastructure industry.

The Cement Manufacturers Association has been asked to stop collecting and disseminating data on cement prices. The eventual impact on the companies’ profitability is not known since they are expected to appeal against the penalty to the Competition Appellate Tribunal (CAT).

Niko’s reserve estimate cut drags RIL

There was more bad news for Reliance Industries (RIL) this week. Canada-based Niko Resources, RIL’s partner in the KG-D6 field, slashed its estimates of gas reserves in the field by almost 80 per cent. Niko, which has 10 per cent stake in the asset, stated that the proved plus probable (2P) reserves at the field stand at 1.93 trillion cubic feet (tcf).

This is sharply lower than its earlier estimates of around 9.65 tcf. Niko’s estimates are also lower than RIL’s recent assessment, in which it had reduced reserves by around 7 per cent. This set the cat among the pigeons and the RIL stock lost nearly 3.6 per cent over two trading sessions on Thursday and Friday.

Reliance Industries has been having a poor run on the bourses over the past several quarters primarily due to falling gas production in the KG-D6 field.

Contrary to initial expectations of output touching around 80 mmscmd by 2012, gas production from the field has been declining continually, and the trend shows little signs of halting. From around 50 mmscmd in March 2011, production dipped to less than 35 mmscmd in March 2012. It is estimated that this will further reduce to around 28 mmscmd in 2012-13 and to around 23 mmscmd in 2013-14. RIL and the government have locked horns over the issue. While the company claims that the output dip is due to technical issues, the government is holding RIL responsible for not drilling more wells.

The latest sharp cut in estimated reserves by Niko has raised apprehensions that the decline in KG-D6 output may be faster and steeper than originally estimated. But the method of computation of estimated reserves by Niko seems to be different from that adopted by RIL.

For instance, Niko has not factored in reserves from the satellite fields in KG-D6 because the development plans for these have not yet been finalised with government authorities. RIL’s estimates are reported to include these reserves.

Hence, Niko’s reserves estimates may not be comparable with that of RIL. That said, the latest development adds to the uncertainties pertaining to RIL’s high-margin oil and gas segment which contributed around 23 per cent of the company’s operating profits in FY-12, down from around 27 per cent the year before.

Published on June 23, 2012
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