Investors unhappy; ACC, Ambuja may underperform: Religare

Mihir Jhaveri of Religare Capital Markets feels that the Holcim-Ambuja deal has not gone down well with the shareholders and expects Ambuja Cements and ACC to underperform in the near-term. Both the stocks tanked in the morning trade on Thursday on the back of the deal. Ambuja Cements fell more than 10 percent, while ACC slipped four percent lower. 

Holcim restructured its Indian subsidiaries, wherein the Swiss cement maker will raise its stake in Ambuja Cements, which in turn will purchase Holcim India's stake in ACC. He also expects ACC to report poor Q1 earnings which may add to the pain. Religare recommends on holding the stock currently. Its target price remains unchanged at Rs 1,240. It may be reviewed after the earnings of the company are out, Jhaveri told CNBC-TV18. Also read: Holcim-Ambuja deal: Brokerages analyse who is a winner Below is the edited transcript of his interview to CNBC-TV18. Q: Ambuja Cements has lost about 12-13 percent of its market capitalisation on Thursday. Do you expect more downside in the stock per se; perhaps more of a de-rating from what it has already seen? A: The de-rating can happen because the earnings are also getting cut and now there will be holding company discount, which will also come in with ACC acquisition. Therefore, in terms of deal, it has not gone well with the shareholders and the stock will be underperforming in the near-term. Q: Why do you see so much of negativity on ACC? A: It is more to do with the group. So, both the stocks are getting hammered. However, ACC is having the results today and anyway cement results are not being great and not likely to be in this quarter too. We are seeing earnings downgrade too, which will be seen in ACC as well. That is a reflection of those earnings numbers which are going to be out today. _PAGEBREAK_ Q: How are you valuing Ambuja on the assumption that the deal will go through? There is a dilution of equity, there is also cash going out and the economic environment is nothing to ride home about. So it becomes a holding company and that also becomes a bit negative. What would your earnings per share (EPS) and valuation be? A: If the deal goes through, we are valuing it on sum-of-the-part (SOTP) basis. So, right now based on our target price we are giving 20 percent holding company discount for ACC. It translates around Rs 46-47 per share and balance based on the normal enterprise value (EV) earnings before interest, taxes, depreciation and amortisation (EBITDA) multiple for Ambuja, have valued at 9 times. It comes to around Rs 129. So, our target largely comes to around Rs 175 but bearing in mind there has not been a multiple downgrade. So, if you take a multiple downgrade into consideration that can go further down. Q: In the Grasim-UltraTech Cement case, the holding company discount is close to about 45 percent. So, why in this case have you assigned 20 percent discount on account of a holding company discount? A: On Grasim-UltraTech, our discount is around 25 percent. It is trading at 40 percent and that is a different thing. But we have assigned 25 percent discount only. Here we have assigned 20 percent discount. Q: Is there a case that your multiple getting de-rated or lowered. If yes, then by how much? It is not that first time that investors have raised that question. Even last time when Holcim introduced topline linked royalty payment, now it is on account of this arrangement. What would be the fair price to earning (PE) that you should assign to Ambuja and ACC? A: If you talk about PE, they are right now trading at around 17-18 percent time one year forward. You will take one or two notches lower. So, 15-16 times PE multiple should be the normal trading range or average trading range. It was only that the scenario has been such that there is a talk on quality over beta which is playing on. So, that is why all the stocks with better balance sheets are trading at higher multiple and that is why cement stocks were also trading. Q: What is your price on ACC and your recommendation? A: Our recommendation on ACC is hold. We have not changed the target price, we have Rs 1,240. We are waiting for the results to come out and then will take a call on that. But our rating remains hold for ACC.