Stock Review: ATLAS COPCO

Investors should seize the opportunity offered by Atlas Copco's plan to delist its shares from the Bombay and Pune stock exchanges and book profits. Shareholders may witness substantial value erosion if they hold on to the scrip.

The promoters hold 83.7%, or 1.89 crore shares, in the company and need to mop up at least half of the remaining 36.6 lakh equity shares to delist it. Though the company reported robust performance in 2010, its fundamentals do not justify the current high valuation, which has been sustained by the promoters' willingness to accept shares at . 2,250, a premium of 58% to the floor price of . 1,426 per share. The actual price for delisting will be discovered through a reverse book building process between March 7 and March 11.

At the current market price of . 2,148.50, the company is valued at 28.8 times its earnings for the last 12 months, which is at a substantial premium to its peers such as Kirloskar Pneumatic (P/E of 12) or Ingersoll Rand (20). Even a reasonable growth over the next couple of years appears discounted in this valuation. Assuming the company maintains its compounded annual growth rate (CAGR) of the last three years in 2011, too, its net profit for the year will be . 211 crore. The indicative price is 24 times of its earnings. By contrast, a similar calculation for the company's peers reveals a forward valuation of just around nine times their current market prices.

Atlas Copco is the Indian arm of the Sweden-based Atlas Group and is one of the leading suppliers of air and gas compressors, construction and mining equipment and industrial tools and assembly systems. Its revenues have grown at a CAGR of 22% in the last five years, while net profit grew at 14%. Its operating margins have fallen by almost 330 basis points during the period to 14.6% for 2010, which is lower than its peers.

The success of the delisting offer remains the only key concern. If the offer fizzles out due to insufficient number of shares tendered or very high discovered price not acceptable to the promoters, the scrip is likely to correct substantially. Stocks of companies like BOC India or Goodyear India have fallen 30-40% from their peaks after their delisting offers failed. Therefore, it is advisable for investors to exit the stock and capitalise on other opportunities in the market.