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Jul 25, 2013, 12.39 PM IST | Source: CNBC-TV18

Ambuja rejig aimed at cash push to Holcim: Nishith Desai

Holcim stands to gain Rs 3,500 crore free of tax from India because Holcim Mauritius is going to be the seller of shares and as per the India-Mauritius tax treaty there is no tax on capital gains

Holcim is in the process of restructuring its Indian arms Ambuja Cements and ACC . It will see Ambuja becoming a flagship company. Holcim plans to increase its stake in Ambuja to 61.3% and Ambuja in turn will buy Holcim’s 50.1% stake in ACC.

However, Kotak Institutional Equities had lowered Ambuja Cements's target price due to its dismal set of numbers. Ambuja Cements Q1 net profit fell 31%. Speaking on  the deal's impact on the target price, Murtuza Arsiwalla says, "We haven’t given full effect to that in terms of our fair value just yet." 

Also Read: Holcim-Ambuja deal: Brokerages analyse who is a winner

Speaking to CNBC-TV18, Arsiwalla added that from the restructuring point, transactions are at current market price, except that there will now be a holding company and discounts will probably creep in.

Nishchal Joshipura, head of merger and acquisition, Nishith Desai Associates believes the biggest beneficiary of the deal is Holcim. It stands to gain Rs 3,500 crore free of tax from India because Holcim Mauritius is going to be the seller of shares and as per the India-Mauritius tax treaty there is no tax on capital gains. 

The other advantage, going by the current restructuring plan, Ambuja saves on dividend distribution tax. “So clearly, upstreaming of cash is one of the most important objective, it appears, of this restructuring,” says Joshipura. 

But the question to be asked, according to Joshipura, is should the Rs 3,500 crore, which has been paid to Holcim by purchase of shares of Holcim India, be factored in the valuation or is this something in addition to what Holcim would have got from the entire scheme of amalgamation.

Below is the verbatim transcript of Murtuza Arsiwalla and Nishchal Joshipura’s interview on CNBC-TV18

Q: Have you changed price targets significantly on both names ACC and Ambuja? And where do you stand now on them?

Arsiwalla: Essentially on Ambuja we have changed our target price, but that is more driven from the earnings which were there as opposed to the proposed restructuring. So, our change in target price is more a function of a poor earnings outlook for the company than to do with the restructuring.

Per se what we believe from a restructuring perspective is that it is the transactions at current market price, largely earnings neutral, but for the fact that there could be a holding company, discount which would probably creep in as you have seen in transactions of similar nature in the past, though we haven’t given full effect to that in terms of our fair value just yet.

Q: Grasim is a clear example of a significant holding company discount. Why should it be any different for Ambuja given how the deal is structured?

Arsiwalla: Grasim is a parallel and a precedent. We haven’t just given the effect to, waiting for essentially the transaction to go through. But the slight difference that I would draw between the Grasim transaction versus what you are seeing in Ambuja and ACC is that Grasim as a standalone entity had a smaller viscose staple fibre (VSF) business and the entire cement business had been transferred to UltraTech, whereas in the current case Ambuja still continues to have a meaningful cement business, which does not get transferred and would not attract a holding company discount and to that extent one could argue that punitive impact of a holding company discount could be lesser. Theoretically speaking there is no basis for a holding company discount. It is just something that we have seen across the board in several companies where such a transaction has taken place.

Q: A lot of investors or minority shareholders of Ambuja are quite unhappy as we can see with the 13 percent fall in the stock, is there a way minority shareholders can protest or block this taking away of cash from the Ambuja balance sheet? Are there any legal precedents to this?

Joshipura: The way I look at it is there could have been three ways in which this restructuring could have been done. The first one is what the company announced yesterday. The second one which could have been more straightforward would be a simple merger of Holcim India with Ambuja and the third way could have been to merge ACC with Ambuja, but because of reasons of maybe to keep two separate branding for Ambuja and ACC and a heavy stamp duty cost, which could be there if ACC is merged with Ambuja they may have rolled out the third option.

Now coming to the first option which the company announced yesterday I think clearly there are two issues which need to be discussed one is the selective upstreaming of cash to Holcim to the extent of Rs 3,500 crore, which there are two or three advantages to Holcim on account of that. First is they get this full Rs 3,500 crore free of tax from India because Holcim Mauritius is going to be the seller of shares and as per the India-Mauritius tax treaty there is no tax on capital gains.

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