Companies & Sectors
IiAS advices voting against Ambuja Cement's proposal to increase royalty to Holcim

Ambuja Cement’s margins have fallen to 26% in 2011 from 53% in 2007, the period in which it paid know-how fees to Holcim. Now the cement maker is proposing to increase the fees by almost two-folds without disclosing additional benefits it would receive from its parent

Institutional Investor Advisory Services (IiAS) has advised shareholders to vote against Ambuja Cement’s proposal to increase technical knowhow fees to its parent Holcim.


Even though seeking shareholder approval (which is non-mandatory as per current regulations) is a right step towards good governance, IiAS says it find that the know-how fees will increase substantially (almost two-fold) after the modification. “Ambuja has not disclosed any additional benefits which it may or would derive in order to justify such a significant hike in payments. Further given Holcim’s over 50% ownership in the cement maker, this ‘ordinary’ resolution serves limited purpose, unless Holcim chooses not to vote,” the advisory firm said in a note.


The Holcim group (controlling shareholders of Ambuja) currently provides various research and training modules to Ambuja, aimed at enhancing its “knowledge repository” and “strengthening the business model”. The charge for such services is borne by Ambuja and is reflected as training and technical consultancy fees in the P&L account. The payments are made on a case-to-case basis, which amounted to 0.7% of net sales for the year ended December 2011.


Ambuja Cement is proposing to adopt a more streamlined pricing model and fix the technology and know-how charges at 1% of net sales from 1 January 2013) as it believes that such a mechanism will better reflect the benefits derived from these services.


“Investors should note that the margins have fallen from 53% in 2007 to 26% in 2011—over which period, Holcim charged Rs180 crore as technical know-how fees. IiAS believes there is little to justify aligning royalty to sales, especially when Holcim does not even use its brand. Paying ‘royalty’ only if the 2007 EBIDTA margins are exceeded may be equitable to minority investors,” the advisory firm said.


IiAS said, considering that the promoters (Holcim) already have 50.6% stake ni the company, it at least expects the cement maker to pass a special resolution requiring 75% approval from all shareholders, similar to recent royalty proposals of Rolta India.


BHEL sales decline for first time in a decade; down 4%

For the first time in a decade, India’s biggest power utility manufacturer has reported bleak results prompting analysts to put a sell recommendation to their clients. However, the management remains cautiously upbeat

Bharat Heavy Electricals (BHEL) has been in a bad shape for the past two-three years. However, when it announced its third quarter results for the period ended December 2012, many pundits and market watchers were in for a rude shock. BHEL had reported its first quarterly revenue decline, the first time in a decade. Net sales, for the quarter ended December 2012 declined 4% year-on-year (y-o-y) to Rs10,219.71 crore, when compared to the same period last year. Operating profit plummeted 20% y-o-y to Rs1,634.06 crore, for the reporting quarter. And the same story followed for its net profit which crashed 17% to Rs1,185.85 crore. This is a worrying trend for one of India’s largest power utilities manufacturer. Several analysts are bearish and have already advised clients to sell the scrip.

Nomura said in its report on BHEL, “The numbers re-confirm our long-standing concerns on sales and margin decline that would lead to pressure on the balance sheet too. In fact, the third quarter (3QFY13) marks the start of revenue decline for the company, in our view.” BHEL revenues missed the brokerage’s estimate by four percentage points. Nomura expects BHEL to be worth Rs174 per share.

Espirito Santo Securities (ESS) echoed similar concerns. It said, “BHEL’s third quarter (Q3FY13) disappointed us on all fronts,” and further said, “We expect further margin compression in FY14E and expect return ratios to decline from 31% in FY12 to 17.7% in FY14E.” It is bearish on the scrip and have recommended to its clients to sell the stock, believing BHEL is worth only Rs190 per share.

A preliminary Moneylife analysis shows a similar story. If we look at the net sales figures, the sales decline comes after several quarters of anemic single digit growth. The 4% decline in net sales is also below the company’s three-quarter y-o-y growth average of just 5%. More pertinently, its operating profit growth average has now touched zero percent when it crashed 20% during the December 2012 quarter. This puts pressure on the management to perform. Having said this, its valuation is somewhat ‘cheap’ given that its return on networth is high, at an impressive 27%. Its market capitalisation is quoting at over eight times its operating profits—not exactly cheap for a company that has been under-performing for the several past quarters.

BHEL’s performance is often considered to be the barometer of the power industry in India. It is one of the largest power equipment manufacturers and has a near monopoly. When you see poor results from BHEL, it tells you the state of affairs of the power industry in India – a giant stinking mess.

However, despite all this, it seems that the management is somewhat upbeat about the future, like most managers. One of the bright spots has been its focus on railways given that a lot of investment is being poured into the railway infrastructure. It hopes to win some orders along with Hitachi, one of its joint venture partners. Other positives included an order for a large boiler package for NTPC worth Rs6,300 crore for the latter’s Nabingar plant as well as for a hydroelectric power plant in Bhutan. The management hopes to close the 2013 fiscal with Rs30,000 crore worth of orders.

On the other hand, analysts are worried, most particularly about the lack of reforms in the power sector which would otherwise have been the catalysts for BHEL. Some of the issues faced by BHEL include a delay in receiving payments, lack of visibility from the defence sector and renewable energy segments. It has already stopped supplying equipment to Visa Power and Indiabull’s Amravati and Nasik projects. The networking capital has risen to alarming levels, highlighting the issue of cash flow that the company is facing. Networking capital is 36% of sales, which is massive figure. Most worrying of all is the amount of provisions that the company took for doubtful debts and contractual obligations—a total of Rs900 crore.

The management has stated that orders inflow has ‘bottomed’ and is witnessing a somewhat visible pipeline in the medium-term. The order book stood at Rs10,700 crore, far less than what most analysts believed to be. Will the company finally turn a new page?


“Demand for commercial vehicles weak; passenger vehicles flat and two-wheelers inching up”

Volumes for two-wheelers would be up about 5%, car volumes could have declined by about 1%, and commercial vehicles would have been down by around 40% in January 2013, estimates

Demand for commercial vehicles is very weak, while passenger vehicles are just about holding up, observes Nomura Equity Research in its Quick Note on the automobile industry based on sales volume data for January 2013. The brokerage estimates that overall industry volumes for two-wheelers would be up about 5%, car volumes could have declined by about 1%, and commercial vehicles would have been down by around 40% in January 2013.


While HMCL’s (Hero MotoCorp) volumes were also slightly better than estimates, Nomura points out that there is a need to check if there has been any increase in inventory. Tata Motors reported volumes which were significantly below Nomura’s estimates in all categories, and there may be a need to reduce estimates further. However, JLR retails in the US were up 25% year-on-year, which in Nomura’s view are strong numbers.


JLR was helped by strong uptick in new Range Rover and Evoque sales. The weighted average promotional spend also decreased by 14% MoM (month-on-month) as the new Range Rover got retailed.


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