Leyland: On overdrive

A new plant for 1 lakh units is being contemplated and that would strengthen the company's product portfolio.

Ashok Leyland's three joint ventures with Nissan for making vehicles, powertrain and developing technology will make its presence stronger in the light commercial vehicle space. A manufacturing plant for 1 lakh units is being contemplated and that would strengthen Ashok Leyland's product portfolio and give it access to technology.

The LCV space has grown at a fairly strong 15 per cent between April and July 2007, over the corresponding period of the previous year. The growth in FY07 over FY06 was just under 34 per cent.

Moreover, it's possible that Ashok Leyland (AL) will get access to Nissan's distribution in overseas markets. On the face of it, the partnership appears to be just what AL needed but how well the truck and bus maker takes advantage of the alliance remains to be seen.

In the June quarter, AL turned in a net revenue growth of just under 14 per cent at Rs 1621 crore. Thanks to a favourable product mix and better sales of spare parts, the adjusted operating margin was higher by about 100 basis points at 9.5 per cent.

As a result, the operating profit was up 27.5 per cent at Rs 155 crore. High interest costs on borrowings to fund the company's capital expenditure have dented the adjusted net profit, which grew by just 3 per cent to Rs 78 crore.

At the current price of Rs 38, the stock trades at about 11.5 times estimated FY08 earnings and 11 times FY09 earnings. Most of the near-term upsides appear to be in the price, given that it could take two years before the benefits from the projects with Nissan filter through.

Esab: Going steady

The parent of Esab India has revised the buyback price in its open offer from Rs 426 per share to Rs 505. The average price of the stock, from the initial buyback announcement of June 26 till a day before the revised offer was announced was Rs 465.41.

The foreign parent held a 37.3 per cent stake in Esab India at the end of the June 2007 quarter and it expects to buy another 20 per cent through this open offer.

Since June 26, the stock has gone up 20 per cent and trades at Rs 495 levels. Esab's open offer works out to 18.2 times trailing 12-month earnings, while other players in the sector like Ador Welding get a discounting of 11 times and D&H Welding trades at 7 times.

In the June 2007 quarter, Esab India's operating profit margin was more or less steady on a y-o-y basis at 24.8 per cent. The company has recently set up new production facilities to leverage strong demand for its repertoire of welding solutions from the infrastructure and the oil and gas segment.

Analysts point out that the company is expected to fully realise these expanded capacities over the next few quarters.

Clearly, the revised open offer price for Esab India is at a premium to other players in the sector.

However, investors with a long-term view should benefit if they keep their shares as the boom in the core sector should continue over the next few years, and ensure adequate demand for Esab's welding products.

Gati: Huge potential

Logistics player Gati's 53 per cent acquisition of Kausar India for Rs 14 crore gives it a foothold in the cold chain business. Since Kausar is listed on the Delhi and Ludhiana stock exchanges, Gati will also make an open offer, which will be at the same price of Rs 72.84.

Gati gets an infrastructure base of 100 cold chain trucks and an annual capacity of 1.2 lakh tonne of refrigerated cargo and clients such as Hindustan Unilever and Nestle.

At an equity valuation of Rs 27 crore, Gati is paying 1.5 times FY07 sales for Kausar. Compared to Gateway Distriparks' Snowman valuation of 3.5 times FY07 revenues, Gati seems to have paid a lower price. Kausar's debt of Rs 8 crore is also manageable.

Cold chain capacities are scarce in India and the potential is huge because of the retail and consumption boom. Besides, Gati does not have any expertise in the business, so the acquisition will be beneficial.

For Gati, which is sitting at the bottom of the logistics value chain in a highly fragmented express cargo and multimodal transport business, the buy could boost its operating margin as Kausar's margin is a strong 20 per cent. Gati's consolidated operating margin was just 8.16 per cent in year ended June 2007.

The express cargo business is expected to grow at 20 per cent over the next few years, and incremental revenue from cold chain business, the company could see its top line touch Rs 1,000 crore by FY09.

However, its low net profit margin (under 5 per cent) means that on a fully diluted equity, its FY09 earnings discount its current price of Rs 104 by an expensive 15-16 times.

With contributions from Shobhana Subramanian, Amriteshwar Mathur and Ram Prasad Sahu