ACC & Ambuja Cements dip on Holcim royalty talks

This could have an impact of nine to 19% on the earnings of both the companies: Macquarie

ACC and Ambuja Cements might have to shell out two per cent of sales as royalty to their Swiss parent company Holcim. The stocks of these two cement companies lost 1.2 per cent and three per cent on the Bombay Stock exchange on Wednesday as international brokerage Macquarie said this could have an impact of nine to 19 per cent on the earnings of both.

A query to Holcim in this regard did not get any response.

“It was expected at some point in time but to happen without Holcim trying to co-brand the product does raise a few eyebrows,” said Rakesh Arora, analyst with Macquarie. The report questioned the royalty attributed to technology support when the cement industry was not so innovative. Also, ACC has already paid Rs 57.3 crore in the name of training, technical know-how, market survey and management fees to Holcim, almost 0.5 per cent of revenue. “The impact is more for ACC as compared to Ambuja Cements, given its poor profitability,” said Arora.

Mumbai-based ACC is the largest producer of cement in India with 30 million tonnes a year capacity. In 2004, Holcim took management control of the company. The company reported Rs 2,815 crore revenue for the quarter-ended June 30. The net profit for the period was Rs 418 crore.

In 2006, Holcim got into a strategic tie-up with a major Indian cement producer, Ambuja Cements, and followed it by gradually increasing its holding to a little over 46 per cent. The company has a 25-million tonne annual capacity, with five integrated plants in the country. It reported Rs 2,578 crore revenue and Rs 469 crore net profit for the quarter-ended June 30.

Both companies are cash-rich and are weighing expansion plans. It is unlikely they would need equity funding. For Holcim, the royalty route is an easy way to take out cash. Both the companies are expected to announce their quarterly results for July-September on Thursday.

Sister concerns like Holcim Indonesia, Holcim Philippines and Siam City are already charged nearly 2 per cent on their annual sales as trademark fees and fee for access to technology and participation in worldwide exchange of ideas. The brokerage expects these stocks to under perform despite cement prices remaining high.