Spentex: Perfect spin

Schoeller buy will add to company's reach and portfolio.

Spentex Industries acquired yet another company, Schoeller Litvinov, for $25 million, including current assets of $9 million.

This is the first acquisition in this calendar year and the third one since the last financial year when it had acquired Indo Rama Textiles and Tashkent To'yetpa Tekstil in Uzbekistan.

Schoeller is a profitable company with revenues of ¤55 million and operating profit of ¤6 million. It manufactures yarns and threads used primarily for technical and industrial purposes and is a European market leader in the yarn industry in segments like special sewing thread yarns, carpet warp yarns and core yarns for weaving mills. The company has a large customer base across 30 countries in Europe.

According to the Spentex management, the acquisition will help the company enhance its geographical presence and a product portfolio which is high-value added and different from what is manufactured in India and other Asian countries.

Spentex plans to continue its inorganic growth strategy and is on the lookout for companies with reasonably large capacities in East Europe, where manufacturing costs are competitive.

Analysts feel that this is necessary in a competitive but capital intensive business like yarn. The company has acquired Schoeller Litvinov with an EV/EBITDA of less than two times (excluding net current assets), which is reasonable.

Its past two acquisitions have started yielding results as its consolidated revenues more than doubled to Rs 897.5 crore and operating profit tripled to Rs 113.57crore. However net profit went up at a lower 25 per cent to Rs 12.58 crore.

For the current year, the company expects to double its operating profit and post a net profit of over Rs 50 crore as its new capacities (excluding acquisitions) will start contributing.

However, the stock has been beaten down heavily in the last six months, and with textiles stocks being totally out of favour at present, the upsides seem limited.

Abbott India: Margin pressure

Abbott India leveraged improved domestic demand for its medications in segments such as gastroenterology, anaesthesia and diabetes in the quarter ended May 2007, but it had to once again grapple with rising operational costs.

As a result, operating profit grew 18.2 per cent y-o-y to Rs 20.8 crore in the previous quarter, while net sales grew 18.8 per cent to Rs 154 crore. Its operating profit margin declined marginally on a y-o-y basis to 13.5 per cent in the last quarter.

The pressure on margins in the quarter ended May 2007 was owing to an increase in adjusted raw material costs on a y-o-y basis.

The Street appears to have factored in the weaker performance of the company in the last quarter - the stock has declined 8 per cent over the past three months compared with 19.5 per cent rise in the BSE Mid-cap Index.

Although not strictly comparable, in the quarter ended February 2007 too, Abbott's operating profit margin had declined 430 basis points y-o-y to 10.7 per cent.

Going forward, the company is expected to grow sales thanks to no signs of weakening domestic demand. At Rs 525 levels, the stock discounts its trailing 12-month earnings about 13.5 times.

Tyre companies: Comfort stretch

For tyre companies, Q1 FY08 is likely to be an improved quarter on a y-o-y basis, as spot rubber prices have averaged Rs 85.7 per kg levels in the June 2007 quarter compared with an average Rs 98 a year earlier.

Weaker average price of rubber in the last quarter is attributed to improved supplies in key East Asian countries, point out analysts. For a tyre company, rubber as a percentage of net sales, typically constitutes about 65 per cent of net sales.

However, a concern for suppliers to the auto industry such as the tyre industry, remains the sluggish demand conditions from two-wheeler and commercial vehicle segments in the last quarter.

Earlier, companies such as Apollo Tyres had hiked passenger car tyres by 2 per cent in February 2007, in a bid to offset surging raw material costs in Q4 FY07.

Meanwhile, lower input prices for tyres in the last quarter have helped improve investor sentiment for the sector "" for instance, Apollo Tyres has risen nearly 21.5 per cent over the past three months compared with 17 per cent rise in the Sensex. MRF had also risen 22 per cent during this period.

With contributions from Priya Kansara and Amriteshwar Mathur