Sun Pharma's US foray

Acquistion had been on the cards after raising $350 million via its FCCB issue

The company has shown its ability to turn around companies Dalal Street shrugged off Sun Pharma's latest US foray via a purchase of Able Laboratories' dosage manufacturing operations for $23.15 million (Rs 104 crore).

The stock closed lower by 0.75 per cent to Rs 666 on Monday. An acquisition by Sun Pharma had been on the cards given that the company had earlier raised an FCCB of $350 million, coupled with a cash flow (net profit plus depreciation) of nearly Rs 256.4 crore at the end of H1 FY06.

Prior to this acquisition, Sun Pharma had taken over Caraco Inc, two brands from Women's First Healthcare and the purchase of a dosage form plant in the US.

Able Laboratories had achieved sales of $103.2 million in CY04, but it had suspended operations in mid CY05, due to non-compliance with US regulations.

Hence, it does appear that an immediate focus of Sun Pharma management would be to stabilise operations at Able Labs after getting fresh regulatory approvals from the US authorities, and then derive synergies with its existing operations in the US.

Nevertheless, prior to suspending its operations, Able Labs' facilities were producing medications in high growth segments like hypertension and that would complement Sun's existing expertise in segments like cardiology and neurology.

Clearly, the Sun Pharma management has demonstrated this ability to turn around companies it has acquired overseas. For instance, take Caraco, at the time of its acquisition in 1997, it was an ailing company with sales of $0.8 million, which has risen to $19.8 million in the September 2005 quarter.

But the market appears to have factored in the growth opportunities for Sun Pharma, as the stock is trading at 25 times estimated FY06 earnings.

GHCL: Textile expansion

With its core business of soda ash throwing good profits, GHCL is trying to grab opportunities in the global textile business. The company announced its second acquisition this month after the soda ash company Bega Upsom in Romania.

GHCL will acquire 90 per cent in Dan River, USA, which is into home textiles for $17.5 million (Rs 79 crore). Though the stock did go up in early trades on Monday, it ended marginally in the red along with the fall in the market.

The $250-million Dan River, a sick company with some well-known brands, has just emerged out of Chapter 11. Around 75-80 per cent of its sales were being manufactured in the US, which made the company uncompetitive.

Dan River has long-term debt of $36 million, which will be restructured on better terms. GHCL chairman Sanjay Dalmia is betting that outsourcing will make Dan River efficient.

Dan River has relied on outsourcing to the extent of 20-25 per cent, which will increase to 90 per cent after the acquisition. Dan River will source home textiles of $100 million from Pakistan, China and

India each. With Dan River, GHCL has found a captive client for its Rs 230-crore upcoming home-textile plant, which will be operational by the end of FY06. GHCL will also gain access to large retailers like JC Penny, Linens 'n Things, Wal-Mart, and Bed Bath & Beyond.

GHCL will use the money it raised in its $80.5 million FCCB issue. If GHCL can achieve the turnaround and reach the targeted 10 per cent margin in Dan River, the deal will be good for GHCL investors.

Tata Chemicals: Grabbing global capacities

Tata Chemicals is grabbing global capacities in soda ash to compete with China, where companies are undergoing expansion programmes. It announced that its 63.5 per cent stake in Brunner Mond Group will cost the company Rs 508 crore.

The UK-based company has a debt of £50 million. Brunner Mond has a capacity to manufacture 2 million tonnes of soda ash at four plants, three in Europe and one in Kenya. The per tonne cost of acquisition works out to about Rs 6,000, which is much cheaper than setting up a new capacity, which will cost between Rs 20,000-25,000 per tonne.

With Brunner Mond's presence in the UK, Netherlands and Kenya, Tata Chem will get more flexibility in marketing across more countries. The company will also get access to 6.8-lakh tonne of natural soda ash capacity in Kenya through the acquisition.

The manufacturing cost of natural soda ash is half of that through the synthetic process. Tata Chem will finance this acquisition from internal accruals (including its Rs 675 crore FCCB).

With this acquisition, Tata Chem has trebled its soda ash capacity and become the third largest soda ash manufacturer in the world. The stock is reasonably priced at about 10 times FY07 earnings.