ACC, Ambuja Cements Stocks Gain On Renewing Existing Royalty Pact With Holcim
A worker pours a bag of cement into a cement processor machine (Photographer Susana Gonzalez/Bloomberg)

ACC, Ambuja Cements Stocks Gain On Renewing Existing Royalty Pact With Holcim

Analysts remained bullish on ACC Ltd. and Ambuja Cements Ltd. as they expect the cement makers’ move to renew their existing royalty pact with Holcim Technology to remove a key overhang from the stock prices.

Under the agreement, the companies will pay a technology and know-how agreement fee at 1% of net sales each year to Holcim, according to their exchange filings. The stocks of both companies had declined earlier this month amid concerns that the TKH fee to Holcim might be raised.

The agreement will range for a period of two years, starting Jan. 1, 2021, the filing said.

Shares of ACC ended 2.3% higher at Rs 1,614.6 apiece on Thursday, while Ambuja Cements ended 4% higher at Rs 246.7 apiece.

Here’s what analysts have to say:

Morgan Stanley

  • Concerns about a higher fee and an overhang on the stock price are likely to go away.
  • One-year forward EV/Ebitda multiples for both companies are low with respect to their historical averages.
  • Expects the stocks to close this underperformance over the next few days.
  • Assigns equal weights to both bull and bear case for Ambuja with volume growth scenario improving.
  • Better-than-expected industry demand, leading to better pricing and earnings growth a key risk to upside

Jefferies

  • Big relief on the royalty status quo.
  • Expects both stocks, which are top sector buys, to do well.
  • Maintains ‘buy’ rating on ACC with a price target of Rs 2,200 apiece.
  • Key risks: Delay in execution of capacity pipeline, rapid and large-scale clinker capacity expansion in north and central India and weaker-than-expected demand growth.
  • Maintains ‘buy’ rating on Ambuja Cements with a price target of Rs 330 apiece.
  • Key risks: Significant capacity addition by industry in key markets, weaker-than-expected demand growth.

Emkay Global

  • Positive news will lift investor sentiment.
  • Full benefits of CY18 signed master supply agreement are yet to reflect in profitability.
  • Change in group strategy visible in last two years.
  • Capacity expansion to help growth.
  • Maintains ‘buy’ on ACC and Ambuja on attractive valuations, cost-saving strategies and capacity expansion plans.

Antique Stock Broking

  • Announcement clears the overhang on both stocks.
  • Both underperformed peers over the last month due to these concerns.
  • Investors focus would again now shift to core business and earnings.
  • Expects utilisation and pricing to pick up in Q4 with the setting in of the busy construction season.
  • Remains buyers of both ACC and Ambuja, with preference for Ambuja.

Of the 43 analysts tracking ACC, 35 have a ‘buy’ rating, six suggest a ‘hold’ and two recommend a ‘sell’. The average of 12-month Bloomberg consensus price targets implies an upside of 9%.

Of the 42 analysts tracking Ambuja Cements, 32 have a ‘buy’ rating, eight suggest a ‘hold’ and two recommend a ‘sell’. The average of 12-month Bloomberg consensus price targets implies an upside of 8%.

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