Back in the M&A game

Sundram Fasteners acquires customers and order book

With Sundram Fasteners acquisition of Peiner Umformtechnik in Germany, its footprint is spreading wider abroad. So far, the company has lagged behind other Indian auto ancillary companies like Bharat Forge and Amtek Auto which have led in acquisitions.

Sundram's only acquisition abroad was that of the precision forging business of Dana Spicer Europe, where the company has invested £1.9 million till 2004-05, and had a £3.4 million turnover in 2004. It has also set up a subsidiary in China to manufacture high tensile fasteners.

This plant began commercial production in May 2004. It had invested $5 million till 2004-05, which could go up to $12.5 million. It has a small subsidiary in Malaysia, where it has invested Rs 40 lakh, which manufactures oil and water pumps. This company had a turnover of Rs 5 crore for 15 months ended March 2005.

Peiner was sold to the $10-billion US auto major Textron in 1998, when it had revenues of $50 million. While Sundram Fasteners has not revealed details on the price of the deal and Peiner's revenues, it will still be the company's largest acquisition so far.

Peiner manufactures a range of fastener products catering to the automobile, industrial and construction sectors. With this acquisition, Sundram will acquire customers as well as order book, say analysts. Mercedes Group, Motoren Werke and John Deere have been Peiner's customers.

In October 2004, it had announced a joint venture with Bleistahl Produktions, Germany, to manufacture sintered valve guides and valve seats in India, where it has invested Rs 9 crore.

In the first half of 2005-06, its exports accounted for 30 per cent of its turnover of Rs 515.98 crore, up from 28 per cent in the previous corresponding period.

But rising interest and depreciation led to a drop in net profit margin to 5.2 per cent in September 2005 quarter compared to 6.4 per cent in September 2004.

Its China plant had revenues of 2.28 crore and will take three years to achieve full capacity. Till then, the company will have to acquire order book by acquisitions like Peiner.

Perhaps that is the reason why Sundram has increased its borrowing limit up to Rs 1,000 crore in the last AGM. In March 2005, its secured debt was just Rs 129.5 crore.

The stock closed about 0.5 per cent higher at Rs 146.

Vesuvius in expansion mode

Vesuvius India, a supplier of refractories to the metal sector, is doubling capacity at a time when the commodity cycle has shown signs of weakening. The street was indifferent to the expansion plan announced and the stock was more or less unchanged at Rs 237.6 on Thursday.

No doubt, the company has been attempting to offset weaker conditions in the steel industry by focussing on providing refractory-based solutions, but that could not prevent a slackening in its sales growth.

In the September quarter, the company's net sales expanded 25.1 per cent as compared to a growth of 26.61 per cent recorded in the first half of 2005.

Another problem the company has been grappling with is that of rising input costs, namely those of graphite and alumina. Hence, raw materials as a percentage of net sales rose 312 basis points to 43.78 per cent in the last quarter. Rising costs led operating margins to slip 193 basis points to 21.72 per cent in the September quarter.

The company is optimistic of improved demand for refractories thanks to the current expansion in the metal sector. However, analysts point out that a further slowdown in the commodity cycle could make it even harder for the company to pass on higher input costs to user industries and that could weaker margins further, going forward. These concerns have led the stock to under-perform the CNX Mid-Cap index over the past one month "" the stock has declined about 5.6 per cent as compared to a 3.6 per cent fall in the broader market.

At the end of 2004, the company's refractories (shaped) capacity amounted to 419,600 pieces, while that of refractories (unshaped) was 18,000 tonnes.

The capex plan involves an outlay of Rs 150 crore and it is understood that the company has not yet worked out the sources of funding. Nevertheless, the company's cash flow (net profit plus depreciation) amounted to Rs 23.6 crore at the end of the September quarter.