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ACC, Ambuja Cements: Higher royalty outgo to dent performance

For CY13 and CY14, the profit after tax (PAT) estimate as per the Edelweiss report is likely to get impacted by 5.8 per cent for ACC and 4.4 per cent for Ambuja.

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The boards of controlled and have increased the payment of technology and knowhow fees to its parent firm to one per cent of the net annual sales of the company, with effect from January 1.

“The board of directors of the company at its meeting held on December 13, 2012, approved the payment of technology and know-how fees to Holcim Limited at the rate of 1 per cent of the net annual sales of the company with effect from January 01, 2013," ACC said in a statement.

The proposal will be presented to the members of the company for their consideration at the next Annual General Meeting of the company, it added. As on 30 September 2012, Holcim held 50.67 per cent in Ambuja Cements and 50.30 per cent in ACC, the BSE data shows.

The development has not gone down well with the markets, with both the stocks slipping nearly four per cent on Thursday in intra-day deals post the announcement. In the last two trading sessions, both these counters have shed almost two per cent each.

“Though we were anticipating such charges to be levied over the next two – three quarters, timing of the same has been a surprise,” says Nirav Shah, an analyst with Antique Stock Broking in a research note.

PT Holcim Indonesia, a 80.6 per cent Holcim subsidiary, also pays royalty (including technical services fees and trademark usage fees) of around 2.1 per cent of sales to the parent. It charges 1 – 1.2 per cent of sales (after certain deductions, effective fee of around 0.8 per cent) as Technical Assistance Fees, around 0.6 per cent as Other Services Fees and 0.7 per cent of sales for usage of ‘Holcim’ trademark.

Impact

The levy of 1 per cent is below the market expectation of 2 per cent of net sales, states flash note on the development from Edelweiss Research.

“Both the companies are already making payments to Holcim towards ‘Training/Technical Consultancy etc’. In calendar year 2011 (CY11), ACC paid Rs 30.9 crore, while Ambuja Cement had paid Rs 32.1 crore towards the same. Factoring the amount already being paid, the incremental impact works out to be in the range of 0.7 - 0.8 per cent of net sales for both ACC and Ambuja in CY13 and CY14,” the note adds.

Adds Manish Sonthalia, Vice President and Fund Manager, Motilal Oswal Asset Management, “Additional royalty fees of 1 per cent is expected to dilute the earning from CY13 onwards. We estimate impact of 4.9 per cent (for ACC) and 3.8 per cent (for Ambuja Cemenbts) at EBITDA level (Rs 47/tonne) and 5.3 per cent (for ACC) and 4 per cent (for Ambuja Cements) at earnings per share (EPS) level in CY13 for 1 per cent royalty fees.”

For CY13 and CY14, the profit after tax (PAT) estimate as per the Edelweiss report is likely to get impacted by 5.8 per cent for ACC and 4.4 per cent for Ambuja.

Going ahead, ACC plans to increase its presence in the eastern markets and augment the capacities by 5.15 Million Metric Tonnes (MMT) by Q1CY15e, reports suggest. It is undertaking brownfield expansions at Sindri, Jharkhand (1.35 MMT) and Jamul, Chattisgarh (1.1 MMT) and greenfield expansion of 2.7 MMT at Kharagpur (West Bengal).

“We remain positive on the Indian cement industry and believe that worst is behind us. We expect earnings upgrade cycle to continue, driven by gradual improvement in demand-supply equilibrium and continued rationality. After recent outperformance, stocks are trading at historical average valuations, leaving limited room for further re-rating. We expect strong earnings growth to drive stock performance, going forward,” Sonthalia adds.

“Cement is not offbeat and a critical infra structure component with high cash generation ability, and would remain a favourite.  Second rung like JK Cement, Heidelberg and Prism Cement would be the next attractions,” observes Anand Rathi, chairman, Anand Rathi Financial Services.

"We retain our BUY stance on both the stocks - valuing ACC at 9.5x CY13E EBITDA implying a target price of Rs1,730 and Ambuja at 10x CY13E EBITDA implying a target price of Rs 240. We factor in better pricing power during the 1HCY13E (which is the peak construction period) should help these companies’ 8% net realisation growth during CY13E. This should in-turn boost ACC’s EBITDA per MT at around Rs 1,130 and Ambuja Cements’ EBITDA per MT at around Rs 1,360 in CY13E," states a Karvy report.

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