ACC and Ambuja Cement share prices: Morgan Stanley expects recovery over next few days

ACC and Ambuja Cement share prices: With renewal of the TKH with Holcim, the concern about a higher fee and an overhang on the stock price is likely to go away. Morgan Stanley expects both stocks to recover some part of their under-performance over the next few days.

The board of directors of Ambuja and ACC have approved renewal of current technology and know-how (TKH) agreements with Holcim Technology Limited (HTL). Under this, companies will pay 1% of net sales to HTL which is the same as the current arrangement. The new agreement is valid for a period of two years starting January 1, 2021.

As background, since the announcement of a one-time special dividend by Ambuja (on October 22,2020), there have been concerns amongst investors that both Ambuja and ACC may see a potential increase in the technology and knowhow agreement fee (from 1% of net sales) to a higher amount starting January 1, 2021 (as the last agreement expires on December 31,2020). This is a not a new concern as similar concerns prevailed during the time of the last renewal in 2017. However, given the timing of the one-time dividend announcement coinciding with the potential renewal of the TKH agreement, this became an overhang on the stock prices in our view. This is visible in the subdued stock price performance of ACC and Ambuja since the dividend announcement date relative to peers.

With the current announcement, we believe the overhang of the TKH renewal will be behind us and concerns around a higher fee will be put to rest. We see that one-year forward EV/EBITDA multiples for both the stocks are low both with respect to their own historical averages and also relative to peers. Morgan Stanley expects the stocks to close this under-performance over the new few days.

Risk on the upside for ACC:

Better than expected industry demand, leading to better pricing and earnings growth

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Lower than expected costs aided by lower than expected petcoke and coal prices.

Risk to the downside for ACC:

Lower than expected margins, led by higher input costs and lower realizations

Lower volume growth in the next two years, as Morgan Stanley expects the company's capacity addition to be muted

Delay in commissioning of new capacity