Europe-bound

BS Compass

Bharat Forge acquisition of Carl Dan Peddinghaus GmbH (CDP) of Germany makes it the world's second largest forging company after Thyssen Krupp.

CDP's annual sales amount to about 90 per cent of Bharat Forge's FY03 sales of Rs 690 crore. CDP supplies chassis components to automakers like BMW, Volkswagen, Audi, Daimler Chrysler and Volvo.

The CDP acquisition fits Bharat Forge well because of two reasons - first, it provides a thrust to the company's recent entry into the passenger car segment and secondly, it gets a much larger presence in Europe.

Till recently, most of the company's exports were to the US markets. But the company's attempt to diversify has been largely successful, and the US markets now account for just 23 per cent of total exports.

China now accounts for a majority share of exports, and the share of Europe has gone up from 8 per cent in FY03 to 16 per cent in the first six months of the current fiscal.

Besides, it's only recently that the company entered the passenger car market, and CDP's expertise in that segment will obviously help in a large way. The company has not disclosed the price paid for the acquisition, but it's important to note that CDP had filed for insolvency of its assets due to liquidity problems in October 2002.

Keeping this in mind, the acquisition price should be inexpensive. However, since the company's share price has remained flat after the news broke, one gets the feeling that the markets would take their call on the acquisition only after further details are disclosed.

Indraprastha Gas

Indraprastha Gas, the gas distribution company in Delhi, is one of only four gas distribution entities in India including Gujarat Gas (Surat, Bharuch and Ankleshwar), Mahanagar Gas (Mumbai) and Baroda Municipal Corporation (Baroda).

IGL provides natural gas for both domestic purposes as well as an alternate transportation fuel, which is the main revenue driver for IGL.

According to a Supreme Court ruling, the public transport system in India has to start using CNG as a fuel instead of petrol and diesel. While Delhi and Mumbai were among the first to implement the system, Pune and Ahmedabad are next in line to convert to CNG in the near-term.

The increased pace of conversion in Delhi of buses and other transportation vehicles (autorickshaws, taxis etc.) to CNG has led to a 15-fold jump in Indraprastha Gas's topline since FY01. This also led to a 28-fold jump in the operating profit to Rs 119 crore in FY03 compared to Rs 4 crore in FY01.

Part of the improvement in profitability has also been due to the hike in price of CNG from Rs 13.11 per kg in April 2002 to Rs 16.83 per kg. This was despite a fixed price of gas from GAIL at Rs 2850 per 1000 standard cubic metres.

Growth in future is expected to come from a higher replacement demand, increase use of gas as auto fuel and an increase in the number of households for its piped natural gas. However, the household sector contributed only around 3.4 per cent to revenues in FY03.

Some of the risks that could impact IGL's performance include the following. First, gas prices are currently fixed by the government. Upon de-regulation of gas prices, there could be a significant upside to the input price of gas.

Gujarat Gas's performance was also considerably impacted due to an upward revision of gas prices by Gujarat State Petroleum Corporation.

Secondly, the Supreme Court had asked the Environmental Pollution Authority to examine the appropriateness of the CNG price hike by IGL. Any ruling against the company could result in an impact on IGL's profitability.

Finally, all cities where gas distribution has been introduced are currently monopolies. While any entry of a new player in the city will be with a gestation and IGL has a first mover advantage, the future could lead to price competition.

With more city transport systems being shifted to CNG, IGL's performance will rest on how well it is able to capitalise on the opportunity. The downside to such expansion is that it will be a drag on the return on capital employed. The price band of Rs 40-48 per share results in a P/E of 9.5 times to 11.4 times FY03 EPS of Rs 4.2.

Post-issue, IGL's huge equity of Rs 140 crore will not increase since it is an offer for sale by IDFC, UTI and ILFS-part of the promoters. The discounting is comparable to Gujarat Gas's discounting of around 9.5 times.

But Gujarat Gas is focused more on bulk consumers (industries), which earn lower margins than retail and commercial segments. Hence, an increase in the residential and commercial customers will imply higher margins for IGL.

With contributions by Mobis Philipose and Sameer Ranade