IiAS advices voting against Ambuja Cement's proposal to increase royalty to Holcim
Moneylife Digital Team 04 February 2013

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.

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