SULZER India

SULZER India, a mid-sized engineering firm, hit the upper circuit with a 20% jump in the stock price for two consecutive days last week. The trigger was the company's announcement that its parent, which currently holds a 80% stake, plans to acquire the remaining 20% stake and delist the company. The stock, which underperformed the Sensex over the past 12 months, has generated a return of 56% this month so far against the Sensex's of 3.4%. 

   The company, originally a joint venture of an RPG group company and Sulzer Corporation, is now 80% owned by the Switzerlandbased company. The parent is an engineering company that manufactures industrial machinery and equipment such as pumps, columns, mixers and so on. With sales of nearly $3 billion in 2009, a marginal decline of 10% over the previous year, it was relatively unaffected by the global meltdown. 

   The company also generated free cash of about $0.5 billion (Rs 2,200 crore) during the year, which probably is the trigger for the buyback proposal with an intention to consolidate its businesses spread across 140 locations. The company had also acquired four small-sized engineering companies in 2009, indicating its financial strength and strategic direction. 

   Sulzer India mainly manufactures separation columns, mixers, compressors and similar equipment. These equipment are used by industries such as oil and gas, fertilisers, and other chemical industries. The company is also dependent upon export markets, with nearly half of its sales coming through exports. With the current phase of slowdown, the company, which recorded a sales growth of more than 50% CAGR for three years ended December '08, has recorded a decline of 22% for the nine-month period ended September '09 — the company follows the January-December financial year, and has not declared annual results yet. 

   However, with a sharp decline in input costs, the company also managed to bring down the raw material cost by almost 27%. Further, with nearly a 75% increase in other operating income due to write-back of the previous provisions, it managed to record nearly a 30% growth in profits. The company, with a market cap of Rs 430 crore, trades at a PE of about 13 times, based on trailing twelve months earning till September '09. 

   While the offer price as per Sebi guidelines would work out to be about Rs 870 per share, the stock last closed at Rs 1,243 on Friday, nearly a 42% premium to that. The company may have to substantially increase the offer price, if it's serious about the proposal. For the company, financing the acquisition should not be a problem, which would cost nearly Rs 90 crore at a price of Rs 1,300, as the company in a considerably strong financial position.