Analyst Corner: Maintain ‘buy’ on Ambuja Cement with TP of Rs 293

By: |
December 26, 2020 8:31 AM

Roll-over of the fee on existing terms will delight investors given Street’s concern of a potential increase in the same. The development is in line with our expectation.

Ambuja cements, technical and know-how agreement, Holcim Technology, ACEM board, energy optimisation (use of alternate fuels), manufacturing excellence, procurement, commercial excellence, innovation, sustainability and safetyAmbuja Cements approved renewal of the TKH agreement with parent Holcim Technology . (Representative Image)

Ambuja Cements (ACEM) board of directors has approved renewal of the technical and know-how (TKH) agreement with parent Holcim Technology (HTL) on same terms as the current agreement.  Accordingly, it will continue to pay TKH fee @ 1% of net sales each year for the next two years. The development clears clouds over the TKH issue, which had weighed on ACEM’s stock price since the past few weeks.

Roll-over of the fee on existing terms will delight investors given Street’s concern of a potential increase in the same. The development is in line with our expectation. Maintain ‘buy’ with target price of `293.

Much to the delight of investors, ACEM’s board has renewed the TKH agreement with HTL for the next two years (2021 and 2022) on the same terms as present in the current agreement. Accordingly, the company will continue paying TKH fee @ 1% of net sales i.e., nearly Rs 140 crore each over the next two years. TKH was first introduced in 2013 and initially approved for five years (2013–17). Thereafter, it was renewed in 2018, with no increase in fee, for three years (2018– 20).

In 2018, the audit committee, comprising a majority of independent directors (and also chaired by an independent director), had recommended extension of the TKH agreement claiming benefits of Rs 1,245 crore from 2013-17. This implied benefit of ~Rs 250 crore p.a. against TKH fee of ~ Rs 100 crore p.a.

These benefits were in the areas of energy optimisation (use of alternate fuels), manufacturing excellence, procurement, commercial excellence, innovation, sustainability and safety. The renewal for 2021-22 is a simple rollover of the same agreement and is in line with our expectation.

 

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