Prefer Grasim, India Cement over ACC, Ambuja: Kotak Inst'l

In an interview to CNBC-TV18, Murtuza Arsiwalla of Kotak Institutional Equities said, the broking firm has a sell call on cement majors ACC and Ambuja Cements since their current valuations appear expensive. "The risk reward is not as favourable at the current trading multiples for ACC and Ambuja Cements."

Other cement stocks like Grasim, India Cement or few midcap stocks are available at comparatively cheaper valuations, he added. Arsiwalla prefers Grasim, India Cement over ACC or Ambuja. Below is the edited transcript of Arsiwalla's interview with CNBC-TV18. Q: Could you take us through ACC? A: ACC numbers are largely more or less on predictable line. The pricing came in at about 20 percent year on year growth, some of the benefits of that were taken in a way by volume decline, which was about 5 percent year on year. But, overall compared to traditional monsoon quarter, September quarter, where pricing is weak the cement sector seems to have held on pricing discipline this time much better than in previous monsoon quarters. That is reflecting in the improvement in profitability that you see on year on year basis. Similar sort of trend is for Ambuja as well, where volumes were weak, but the pricing made up for it. Q: You have a sell on both Ambuja Cement and ACC. Take us through the rational on why you have sell on both of them? A: These companies are trading near peak multiples with consensus as well as our own estimates building in a fairly benign operating environment, improved profitability etc. If one looks at Grasim or India Cement or some midcap names, the trading multiples are far more cheaper valuations versus an ACC and Ambuja. In our view, the risk reward is not as favourable at the current trading multiples for these names. _PAGEBREAK_ Q: There was no comment on the Holcim royalty issue. Is that to be taken as a positive? A: The street was not talking of this royalty issue a few days ago. I am not too sure whether it comes up in subsequent quarters or not. Holcim globally charges 2 odd percent for most of the regional plays. Look at other sectors than cement, most of the MNC holding companies do charge a percentage of sales for royalty or technology transfer. It may not hold true as much for an ACC and Ambuja because they do not use the traditional Holcim brand name. But it is not something that cannot be entirely ruled out. For now though, there is no mention of it unlike as was speculated in the media over the last few days. Q: If it does come through what sort of impact are you factoring in on the P&L? A: We are not factoring any of that. Nonetheless, if you look at 2 percent royalty, which is what Holcim charges, the earnings impact could be anywhere between 8-10 percent for both ACC and Ambuja. Q: You are going with 2 percent of sales, is it? A: Yes, 2 percentages of sales. _PAGEBREAK_ Q: Some brokerages are worried about realisations of ACC. Would you be worried about realisations going forward for the likes of something like ACC? A: Given that we are moving out of the monsoon quarter, we are building some amount of pricing strength. But if you look at ACC sales mix specifically, ACC has more of a south presence compared to Ambuja or some of the other Pan-India players. So, most of the incremental capacities over the last two-three years did come in south. South is seeing some sort of price softening. I am not too sure whether the rest of the regions could compensate for the price decline or otherwise, but cement pricing has been something that is much difficult to get right on a month-on-month basis. It is kind of unpredictable in that sense. Q: What would be your picks in the cement space? A: We have been highlighting Grasim, India Cement over ACC or Ambuja over the last six-nine months. We continue to maintain that stance for now.