Apart from the volatile external environment and domestic slowdown, there is a new element of risk emerging that Indian investors will have to bear in mind. In the recent past, the Competition Commission of India (CCI) has been proa-ctive in penalising companies for unfair practices, a trend likely to continue as the economy grows bigger. After DLF last year, United Phosphorus, Excel Crop Care and a few other companies were recently charged with heavy penalties for cartelisation. In fact, there are many more companies in sectors like real estate, cement and tyres under the CCI scanner. If proved guilty, it could lead to significant erosion in their earnings.
Facing the heat
The larger impact was seen in the case of United Phosphorus Ltd (UPL), which has been asked to pay a penalty of Rs 252.44 crore or almost 30 per cent of its 2012-13 estimated net profit. CCI imposed a penalty of nine per cent of its average standalone turnover over the past three years. As analysts raised concerns over the impact on earnings, UPL’s share price fell initially by about nine per cent (compared to closing price of April 25). However, the scrip has regained some ground post results and buyback announcement on Monday; but is still down 3.5 per cent.
The impact is equally high for Excel Crop Care, a leading provider of agriculture inputs. CCI has imposed a penalty of Rs 64 crore, more than 90 per cent of its expected net profit in 2012-13. If these are paid, they could wipe out the profits of both companies in the current year. The penalties were levied against the charges of cartelisation pertaining to collusive bidding for aluminium phosphide tablets - used in pest control of food grains - of FCI. CCI stated the companies including UPL, Excel Crop and Sandhya Organic Chemicals, by acting together had quoted identical prices.
| HIGH IMPACT | |||
| In Rs crore | Penalty | FY13E profit | % of profit |
| United Phosphorus | 252 | 820 | 31 |
| Excel Crop | 64 | 65-70 | |
91-98
Both listed players have proposed to challenge the said order before the Competition Appellate Tribunal (CAT). UPL said in a release, “The Company believes there is no violation on its part as alleged by CCI and it will, in due course, take steps to file an appeal.”
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Analysts, though, are still not factoring in the penalties, even as they are a bit cautious. “Till now, most analysts are treating it as contingent liability till the time it is clear and the actual amount to be paid is known,” says Akshit Shah, who tracks the realty sector at SBICAP Securities. However, most analysts believe if the final outcome is not in favour of the companies, the impact is bound to be significant on earnings and stocks.
Apart from the aforesaid companies, there are many other cases under the CCI scanner whose names and charges will be known in the coming months. Reports suggest that complaints against companies, especially in the real estate sector, are piling up at CCI. It is expected that in the current month, CCI could come out with orders for cement and tyre producers for alleged cartelisation. Tyre companies last year raised prices due to of rising rubber prices. However, there are allegations that the top five tyre makers, which account for about 95 per cent of the domestic tyre market, have colluded to fix prices. CCI is looking at the case closely and the findings are still awaited.
“In the case of cement, the reference for cartelisation is the period from 2007 to 2011. We do not know the actual outcome and the timelines but definitely perceive this as a risk, going forward, for the sector,” says Ajit Motwani, who tracks the sector at Emkay Global. Between 2007 and 2011, the average all-India cement price has moved from Rs 200-210 per 50-kg bag to about Rs 260 a bag or 20-25 per cent. However, analysts also say at the same time costs have also gone up, especially that of coal, which have hit the margins of many cement companies. “We spoke to the companies and most of them have accepted that the investigation is going on and CCI has asked for information. But at the same time, companies are also saying that the fine or penalties may not be significant,” says V Srinivasan, who tracks the sector at Angel Broking. While the outcome is awaited, what these events indicate is that investors will need to bear in mind the added risk to earnings, and, hence, stock valuations.
More teeth to CCI
Experts say the role of the earlier MRTP (Monopolies and Restrictive Trade Practices) Act, which came into force in 1970, was limited to certain areas. However, in the Competition Act, the role was extended in view of the needs of the growing economy, especially in the light of liberalisation and divestment in public sector units. To some extent, private sector companies were provided a level field. However, despite its need, the Competition Act was only fully enforced from June 2011. It started on a broader framework of promoting competition and restricting abuse as against just curbing monopolies in the case of the MRTP Act. The increasing role of the CCI will also reflect in future merger and acquisition activities in the country. The commission is empowered to direct the companies to discontinue or re-visit an agreement, which is anti-competitive in nature. The recent mega-merger of Sterlite Industries and Sesa Goa had to go through the CCI scanner before it got the approval.