Testing times

Acquisitions to drive top line at Bharat Forge, but earnings growth may not keep up

The Bharat Forge stock has lost almost 8 per cent in the past two trading sessions, much more higher than the drop in Nifty. For a stock that's run up by over 10 times in the past three years, that's not surprising.

In fact, amid the anxiety surrounding stocks that have run up sharply in the past, the markets have ignored another smart foreign acquisition made by the auto component company.

After acquisitions in Germany and the US, the target company this time around is from Sweden. Imatra Kilsta AB and Scottish Stampings (Imatra Forging group) had annual revenues of about Rs 580 crore, which will add about 30 per cent to Bharat Forge's consolidated FY05 turnover of Rs 1,993 crore.

Like its earlier acquisitions, Imatra would give the company access not only to additional capacity abroad (Imatra's annual forging capacity of 1 lakh tonne would increase Bharat Forge's forging capacity by over 40 per cent), but also give it access to Imatra's existing clients such as Volvo, Scania, Perkins, IVECO and Saab.

The company is increasing its steel forging capacity by 85 per cent to 2.4 lakh tonne (excluding Imatra's capacity), much of which is pre-sold to clients. If the Imatra acquisition is successful such as the CDP one in Germany, achieving analysts' estimates of 60 per cent top line growth in two years should hardly be a problem.

Given the increasing thrust on exports, earnings growth may, however, not be in line with revenue growth.

Bharat Forge's Indian operations (including the exports business) had an operating margin of 26.9 per cent in FY05. CDP, the German company it had acquired in FY04 had an operating margin of just 12.5 per cent in the same period.

Apollo Hospitals

After an unsuccessful first attempt, the Apollo group of hospitals has again made a bid to acquire 10 centres under the UK's National Health Service and hopes to bag at least two or three this time. The company also plans to enter Poland, Yemen, Kuwait and Nigeria to set up hospitals.

Apollo has a 35 per cent share in private healthcare market in India and is hoping to use its expertise overseas. Also, medical tourism is expected to be a $2 billion market by 2012 and that's where India has good potential. Medical costs in India for surgery and hospitalisation are significantly cheaper than in the West.

The difference could be to the extent of 40 to 50 per cent, which is why patients from the Gulf are coming here more frequently. If Apollo can establish its credentials overseas and get a couple of accreditations for its hospitals in India, it can convince patients abroad that Indian hospitals are a good value proposition.

The company recently raised $ 65.1 mn through a GDR and so is in a position to fund its acquisitons and expansion. It has talked of buying Escorts Heart Institute too, though it's not immediately clear which group company will ultimately buy which hospitals.

The aggressive growth plans should nonetheless pay off given that the healthcare spend in India is estimated to go up from $19bn to $44 bn by 2012 and also because Apollo is an integrated healthcare player with a presence in hospital consultancy, pharmacy and medical BPO.

That's possibly why the stock commands such high valuations. At the current price of Rs 485, it is trading at 32 times FY06 and 25 times FY07 estimated earnings.

India Cements

A co-promoter of India Cements, N Srinivasan, has purchased 16.5 million shares or approximately 11.9 per cent stake in the company from fellow promoters, the Sanmar group.

The valuation of the transaction is estimated at Rs 187 crore. A public offer would not be triggered by this reshuffle as the sale is going to take place between the two promoters.

Before a sharp fall on Thursday, the stock had gained about 22 per cent, compared with an 8 per cent gain in the Sensex in the last month. Increased investor interest was owing to a revival in demand in the company's key markets of Andhra Pradesh, Tamil Nadu and Kerala over the last few months, driven by a pick-up in infrastructure activity as well as residential construction.

Despite the pick-up in demand, prices in south are more or less flat on a year-on-year basis. As a result, gains accruing to companies such as India Cements are largely owing to enhancement of operating efficiencies.

The company had earlier arranged funding of about Rs 650 crore from foreign investors and co-investors, for refinancing its debt. As a result, loans had dropped about 3 per cent to Rs 1987.24 crore at the end of FY05.

And improved volumes of sales helped the company's earnings before exceptional items amount to Rs 5.78 crore in the June quarter compared with a loss of Rs 18.1 crore in the corresponding period of the previous year.

With contributions from Mobis Philipose, Shobhana Subramanian and Amriteshwar Mathur