Holcim royalty won’t hit ACC, Ambuja much

This story first appeared in DNA Money edition on Tuesday, December 18, 2012.

Cement companies ACC and Ambuja may not face any major impact from the royalty payment to Swiss parent Holcim, with experts saying it would affect their profitability marginally.

Putting all speculations to end, the Boards of ACC and Ambuja have confirmed the payouts to Holcim with effect from January 1, 2013, to be presented to shareholders for consideration at the next annual general meetings.

The companies would shell out 1% of their net annual sales to Holcim as technology and know-how fees (read royalty). Experts, however, said the impact on profits would be well under 2%.

The announcement removes the overhang on both the stocks as investors have been awaiting clarity on the issue, they said.

Rajesh Kumar Ravi, analyst, Karvy Stock Broking, said the development will have a marginal impact on the profitability of both the companies if they are not able to pass on this cost.

“The increased royalty should increase cash outflow by 0.4-0.5% of net annual sales. This should lower ACC’s estimated calendar year 2013 earnings before interest, taxes, depreciation and amortisation (Ebitda) by 2% and profit after tax by 2.5%. Ambuja’s calender 2013 Ebitda and net profit would be lower by around 1.6%, if not completely passed through,” Ravi said.

For the first half ended September 30, ACC and Ambuja registered net annual sales of Rs5,638 crore and Rs5,199 crore, respectively.

Assuming the same figures for calendar 2013, the 1% technology and know-how fees for both companies works out to Rs 56.4 crore and Rs 52 crore, respectively.

A Morgan Stanley report in June had said that ACC and Ambuja were already paying 0.6-0.7% of net revenues to Holcim towards a few services such as training and technical consultancy.

Starting January, this expenditure will increase to 1% of net sales.

Raashi Chopra, analyst, Citi Research, said the proposed royalty is intended to bring the Indian subsidiaries more in line with the group practice and replace some of these payments.

“Thus, the negative effect of the royalty would be partly offset,” said Chopra in a recent report.

Though there was some confusion whether 1% was over and above the existing outflow, an ACC spokesperson confirmed that the technology and know-how fees is not over and above the existing expenditure being incurred by the company and will be inclusive.

“This, however, is lower than the level of 2% being indicated by various reports earlier,” said Ashish Jain, analyst with Morgan Stanley Research, in a recent report.