Reliance: Sound deal

The Hualon buy, besides capacity addition, will provide access to new product markets and segments.

Reliance Industries (RIL) appears to be clearly focused on ramping up its overseas presence, with a second acquisition in a matter of a few days.

RIL has now reached an agreement with the receivers and managers of the Malaysia-based Hualon Corporation to acquire the assets of Hualon for an undisclosed price.

The Malaysian company is focused on the polyester sector and had an annual turnover of $800 million (approximately Rs 1950 crore) according to the advertisement for sale on Hualon's website.

Apart from this, no other financial details are available regarding this Malaysian company. In mid-2004, RIL had taken over Germany-based Trevira in a bid to strengthen its foothold in the rapidly growing European polyester market.

Clearly, this Malaysian acquisition is well timed given that margins in the polyester business are lower than in earlier years and it would have enabled RIL to buy this company at an attractive price, say analysts.

For instance, in Q1 FY08, in the polyester business, for RIL, its partially oriented yarn margins were estimated at Rs 13-14 per kg levels compared with Rs 18 a kg a year earlier, add analysts.

Also, Reliance's polyester staple fibre margins were estimated at Rs 13 a kg in the June 2007 quarter compared with Rs 11-12 a kg a year earlier.

Hualon is an integrated polyester-to-textile manufacturing company with a half-a-million tonne annual polyester capacity and 250,000 spindles for spun yarn manufacturing. Hualon is understood to derive a significant portion of its revenues from overseas markets.

For Reliance, the synergies are clearly visible and it has highlighted that this acquisition will help the company to grow its capacity by 25 per cent to 2.5 million tonne a year, coupled with access to new product markets and segments.

RIL, prior to the latest acquisition, is already one of the leading global players in the polyester market. The stock gained 1.3 per cent on Monday.

Just last week, RIL took over Mauritius-registered Gulf Africa Petroleum Corporation (Gapco) for an undisclosed sum. Analysts point out that in the absence of financial details from RIL's two recent acquisitions, they are not immediately changing their EPS estimates. At Rs 1,987, the RIL stock gets a discounting of 22 times FY08 earnings.

Carborundum Universal: Russian fit

Carborundum Universal, a part of the Murugappa group, announced the acquisition of an 84 per cent stake in the Russia-based Volzhsky Abrasive Works is at a reasonable price.

The company via its overseas subsidiary CUMI International is paying $37 million for this Russian company whose sales were $54 million in CY06.

It is understood that the Russian company holds 12.7 per cent of its own stock as treasury investment, which will be cancelled and Carborundum's stake in this overseas company would rise to 96 per cent.

After taking into account the open offer for the remaining 3.3 per cent minority shareholders, the deal would work to less than one times revenues.

For Carborundum, the synergies are there to be clearly exploited from this acquisition - it is already well established in the domestic and export market such as Europe and North America for its repertoire of abrasives and refractory products.

This Russian company is a fully vertically integrated player for products such as silicon carbide, bonded abrasives and refractories, coupled with a large export presence in CIS countries.

Apart from the Russian acquisition, Carborundum had also recently entered into an agreement with IVP Ltd, for acquisition of its industrial ceramics division at Aurangabad. This unit produces a range of products such as ignitors, seals, thread guides and nozzles which have direct synergies with Carborundum existing product range.

In the June 2007 quarter, Carborundum standalone net sales had increased by 25 per cent y-o-y, but its operating profit margin fell 150 basis points to 17.3 per cent. This was because raw material costs increased by 380 basis points as a percentage of sales.

However, on its consolidated financials, its operating margin in the June quarter was 19.73 per cent, better than 19.5 per cent in FY07. At Rs 180, the Carborundum stock trades at 22.5 times FY07 earnings.