Tyre firms likely to get stressed further on CCI move

Rohit Joshi and Siddharth Tak/Zee Research Group/Delhi

The proposed action against tyre companies by the Competition Commission of India (CCI) is set to further strain their profitability.

R Prasad, a member of Competition Commission of India, told electronic media late last month that a probe on tyre companies was underway and an order was likely in the next 10 days.

A Zee Research Group (ZRG) analysis showed that while all the major tyre companies would be hit the worst hit might include JK Tyre and Ceat. The benchmark used to assess the likely damage is turnover and not profits of these companies. The regulator mind on whether it would impose the penalty on turnover or profit is not yet clear.

The CCI recently imposed a hefty penalty of over Rs. 6,000 crore on 11 leading cement producers after finding them guilty of forming cartels. In case of cement companies the CCI used profitability as the benchmark. The CCI action had its impact on the stock prices of these companies and the same is likely due when tyre companies probe is complete.

The regulator is probing charges against five major tyre companies (Apollo Tyres, MRF, JK Tyre, Ceat and Birla Tyres) which control 95 per cent of the sector, along with Automotive Tyre Manufacturers’ Association (ATMA) allegedly colluded to fix prices. The tyre companies on their part have denied any cartelization move.

According to the CCI Act 2007, in case proven guilty CCI shall impose a penalty on participants in that cartel. The penalty will be equivalent to 10 per cent of average turnover of the cartel for the preceding three financial years or three times the amount of profit made out of such agreement by the cartel, whichever is higher.

However, considering the weak profitability of the tyre companies, there is a view that supports that if penalty is to be levied it ought to be levied on the turnover. Based on this assumption, ZRG analysis shows that if penalty of 10 percent is imposed on the average turnover of preceding three years then this decision would have detrimental impact on stocks like JK Tyre and Ceat.

An interesting trend emerged out on an analysis conducted on per share basis, it is estimated that for JK Tyre counter, a penalty of Rs. 142 might be imposed which is higher than the current share price of Rs. 94, followed by Ceat, where the penalty of Rs. 109 is once again greater than the current share price of Rs. 96.

However, less impacted companies ones would be Apollo Tyre and MRF Tyre where penalty expectation of Rs. 19 and Rs. 1973 is less than the current share price of Rs. 78 and Rs. 10,150 respectively.

In absolute terms, Apollo Tyre could be fined with maximum penalty of Rs. 971 crore, followed by MRF (Rs. 829 crore), JK tyre (Rs. 583.7crore), and Ceat (Rs 371.7 crore).