Thread by @TheFactFindr

#Indian #CEMENT Stocks: When #NARRATIVE turns 180 deg SOUTH

Trigger: CCI Investigations (This time ITS DIFFERENT)

... A thread.. You will Enjoy it... its almost "fictional"

1/ For Years starting 2012, there have been accusations that the Indian Cement Industry worked as a "Cartel" given how resilient Cement Industry Margins were despite sharply falling UTILIZATION levels - The NARRATIVE that supported lofty Valuations given resilient Cashflows

2/ In 2016, the Competition Commission of India (CCI) imposed a $800mn fine on 10 companies for fixing prices, including the Holcim units and UltraTech, but the decision has been challenged since then at the Supreme Court (SC).

3/ When Adani Group won the bid to acquire Holcim's subs: Ambuja & ACC for $10.5bn (Rs 81,339 cr) in May-22, the "Narrative" was "Adani taking on Fresh Debt, so its in their interests for Cement Prices to remain "Favorable", Adding conviction to the Earlier Narrative (Point 1)

4/ Meanwhile, CCI once again started examining complaints of cartelization in the cement industry in 2019

5/ Lately, per media reports, CCI is putting finishing touches to a fresh investigation. Reports say tht "Holcim’s India (ACC & ACEM) and 18 other other cement manufacturers (accounting for over 75%+ of Industry Capacity) colluded to raise prices and restrict supplies for years"

5 contd/ "which included regularly inspecting one another to ensure there was no breach of the agreements.. as per evidence collected by CCI"

6/ Media rpts "CCI report accuses 50+ executives of cement companies discussed coordinated price hikes in Zoom calls & in-person meetings at company guest houses, with some officials using personal mail to communicate with rivals. WhatsApp messaging was also extensively used."

7/ The STOCK MARKET REACTION has been Entirely Dismissive of this fresh CCI Report related News - the Sense amongst Investors being that even 2016 Accusations of CCI has been mired in legal clutches of SC hearings.

8/ IS IT DIFFERENT THIS TIME ? IMHO, the Answer would be YES - Cause a POSITIVE Development for thr CCI vs Cement Industry benefits new cement Industry Entrants in a BIG WAY... Let me explain

9/ When CCI applies a FINE, it typically can be as high as HALF the years Profits - Table attached Shows what happened in 2012. CCI also asks the companies to deposit the penalty amount with 3 months. This time, its a 10 year Investigation.

10/ Assuming CII also applies a FINE & Interest Component, it potentially could be 10 years of Profits.

Lets discuss the IMPLICATIONS into 2 Parts: (1) ACC/AMBUJA Acqusition (2) Remaining Cement Companies into Big Players and Smaller Players.

11/ Part 1: ACC/ACEM: The current narrative is that ADANI will make an Open Offer for the holcim group. HOWEVER, when a BUYER buys out Assets from a Seller - its always "SUBJECT to regulatory Approvals".

12/ IMHO, if CCI announces a FINE, the BUYER for ACC/ACEM could always go back to HOLCIM and re-negotiate on the PRICE to Adjust for the fine. So the Markets Assumption of an OPEN OFFER Price is entirely Questionable.

13/ If HOLCIM Adjusts their Selling price downwards, the OPEN offer too would Adjust downwards. But so many RETAIL speculators are locked in at higher Prices, they wont offer their stock in the Open Offer which is "Perfect" for the Buyer.

Hope you get the Drift....

14/ Part 2 - Section A: If CCI hypthetically applies 10yrs of Profit (including Fines & Interest) on the Cement Industry, the BIGGER cement companies would cerntainly DELAY thier CAPEX PLANS for a few years => Great for the NEW ENTRANT as they gain Market Share.

15/ Lenders would certainly NOT fund the Smaller Cement companies. The NEW entrants would be happy to acquire these Smaller Cement Assets knowing full well that the CCI Sword hangs over these assets.

16/ REMEMBER that Cement stocks in India trade at Lofty Valuations despite being a Commodity. The reason being that despite falling UTILILZATION levels, they managed "respectable" EBITDA/t and we suspect why that was the case.....

Here are some Charts on Cement Company Valuations... at 17-20x EV/EBITDA, they trade like FMCG companies.. while STEEL companies trade at just 2-3x EV/EBITDA.

This is one of the Key Reasons why HOLCIM is happy to sell their India Assets given Above replacement cost valuations vs globally they trade at single digit EBITDA even in Emerging Markets.

Bottom-line: Watch the CCI - the Market is ignoring this risk - I would back the "New Entrant" as the Winning Horse. Remember the "New Entrants" becomes Dominant in every Industry at the "cost of encumbents". We have been this even in Telecom - why should it be different ?

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