Holcim Indonesia agrees to higher royalty payout

PT Holcim Indonesia has increased the royalty to its parent company – a move that has surprised some analysts and caused the cement producer to plunge the most in four years in Jakarta trading.

Holcim Indonesia slumped 17 per cent to IDR2900 on 28 December 2012, the steepest decline since October 2008 and the biggest drag on the benchmark Jakarta Composite Index, according to reports by Bloomberg.

The company, based in Jakarta, signed a royalty agreement with Holcim Technology Ltd on 26 December, as part of a move to standardise licensing agreement globally, according to a statement to the stock exchange. Under the new accord, Holcim will pay a four per cent tariff rate next year and five per cent in 2014 and beyond. This compares with the current rate of 2.5 per cent, according to Rusli Setiawan, a company spokesman. 

Following the news, CLSA Asia Pacific Markets downgraded Indonesia's third-largest cement producer from 'outperform' to 'underperform' saying that the company’s margins and earnings will be eroded after it to agreed to a higher royalty payout.

"It is unlikely that Holcim can pass on the exorbitant increase. As a small player, it lacks significant presence. We cut our earnings (forecast) by 10-14 percent. Holcim is more expensive than Indocement, with the lowest EPS growth and ROE vs peers," analysts Sarina Lesmina and Edward Tanuwijaya said in a note on Wednesday.

Holcim Indonesia now effectively pays much higher royalty than its sister companies. ACC and Ambuja Cements in India saw a royalty increase to one per cent recently, from 0-6-07 per cent previously. Holcim Philippines and Siam City Cement (Thailand) pay about two per cent currently. Indonesia’s lucrative market conditions may be the reason for the higher royalty, the analysts said.