Nirma: Inorganic growth

Nirma will produce 2 mt of soda ash, following the Searles Valley Minerals buy

Nirma, India's largest synthetic soda ash producer, acquired the $299 million US-based natural soda ash producer Searles Valley Minerals (SVM). It has thus joined the list of companies such as Tata Chemicals and GHCL which have acquired soda ash companies abroad.

Tata Chemicals acquired Brunner Mond, UK to become the third largest soda ash producer in the world after Solvay and FMC. GHCL bought two Romanian soda ash makers, one each in 2005 and 2007.

The increasing demand for soda ash in the last few years augurs well for Nirma. Developing countries need soda ash for manufacturing floatglass, pharmaceuticals and detergents.

Nirma will produce 2 million tonnes of soda ash, following the SVM buy. It had a manufacturing capacity of 0.65 million tonnes at the end of FY07 and its associate company Saukem produced 0.37 million tonnes.

The contribution of soda ash to Nirma's turnover rose from 12.6 per cent in FY05 to 15.6 per cent in FY07, aided by better prices, in spite of a decline in capacity utilisation.

The acquisition move will significantly change Nirma's revenue mix, with inorganic chemicals accounting for nearly half of the revenues going forward. Nirma has not been doing too well on the profitability front, with its operating profit margin having fallen from 28 per cent in FY04 to 16.5 per cent in FY07.

The revenues declined 5 per cent in Q2 FY08 and the margins continued to remain under pressure, declining 500 basis points y-o-y to 13.5 per cent. This is because the company has not been able to withstand competition in the soaps and detergent market.

While soda ash may be a commodity business, it should still earn better margins. The production cost of natural soda ash is cheaper than synthetic soda ash due to lower power and labour costs.

In terms of valuation, the cost of the acquisition will be upwards of one times enterprise value, according to analysts. Nirma may not find it tough to raise money for this purpose as its debt-equity ratio was 0.13 times in FY07.

The market reacted positively and the stock has jumped 14 per cent since the announcement of the acquisition. At Rs 234, the stock trades at a trailing 12 month P/E multiple of 22 times, which is expensive.

Garware Offshore: Unattractive offer

The open offer in Garware Offshore Services at Rs 230 a share is at a premium of about 16.8 per cent to the stock's average 26-week price prior to the announcement. But it is still at a discount of 5 per cent to the market price.

The open offer is being made at 19 times estimated CY07 earnings and 13-14 times estimated CY08 earnings. Indiastar, a Mauritius-based fund, upped its stake in the company beyond 15 per cent after a share conversion and is thus legally required to make the open offer.

The boom in the upstream oil sector has resulted in spot day hire rates for vessels touching nearly $100,000 a day in September 2007 quarter compared with $30,000 per day a year earlier, point out analysts.

As a result, the core operating profit margin of Garware Offshore rose by 310 basis points annually to 60.4 per cent in the June quarter.

High crude oil prices is expected to ensure strong demand conditions for Garware's vessels and allied services over the next few quarters.

To leverage these growth opportunities, Garware Offshore Services' subsidiary has signed a contract for the acquisition of one construction work barge for delivery in July 2009. With buoyant industry conditions and better prevailing prices on the bourses, there is little reason for investors to tender their shares in the open offer.

With contributions from Priya Kansara and Amriteshwar Mathur