Two to tango

KPIT Cummins acquires majority stakes in two foreign companies

It's not just large software companies such as Tata Consultancy Services (TCS) and Mahindra British Telecom (MBT) which are stalking acquisitions overseas. KPIT Cummins, a mid-rung player, has joined the bandwagon by gobbling up two foreign firms in a day.

KPIT Cummins has acquired a 90 per cent stake in SolvCentral.com, US, a provider of business intelligence solutions. The tab for the deal is $2 million, of which 90 per cent would be paid in cash and the rest in KPIT stock. At this price, the valuation works out to 0.6 times sales, with SolvCentral expected to post revenues of $3.5 million in 2005.

In another buyout, KPIT has bought 70 per cent in Pivolis""a French consulting firm with which it already had a partnership. The cost for the stake is euro 1.75 million, of which half would be paid in cash and the rest in stock. With estimated CY2005 revenues of euro 2.5 mn, the valuation works out to one times sales. Pivolis enjoys gross margins of 30-35 per cent.

In both instances, the balance stake would be bought out by KPIT within three years, subject to certain performance criteria, and so the total investment is estimated at about $10 million, based on projected revenues.

In both the deals, the shares are being issued at around Rs 300 a share at present, which is close to the current market price of Rs 305. Therefore, the dilution is small, around 1.25 per cent now and between 2-2.5 per cent at the end of three years. Since the acquisitions would add around 15 to 16 per cent to KPIT's net profit, the deal is earnings accretive.

The acquisitions would help KPIT increase its offshoring revenues, and enter France""a new geography""through Pivolis. The deals would open doors for the company and give it new customers to whom it can cross-sell services.

With SolvCentral, the company strengthens its business intelligence domain. The reason for leaving a small stake with the existing promoters is clear: since the business is people-driven, the comfort level of employees would be higher if the present promoters are around for some time.

The stock had been underperforming for a while but since October it has outperformed the BSE IT Index, gaining 11.8 per cent compared with 6.8 per cent for the index. At the current price of Rs 305, the stock trades at around 11.5 times estimated FY06 earnings, and appears to be reasonably valued.

Everest Kanto Cylinder

Everest Kanto Cylinder (EKC) is raising Rs 90 crore through its public offer, priced between Rs 140 and Rs 160 a share.

EKC manufactures high pressure seamless cylinders for industrial gases, medical gases and the recent growth driver "" CNG cylinders for automobiles. Besides two plants in western India, it also has a plant in Dubai, which commenced production in 2003-04.

Its domestic plants were running at almost 96 per cent capacity utilisation in 2004-05, though the Dubai plant had a capacity utilisation of 58 per cent. EKC is setting up a 340,000 cylinder per annum plant at Gandhidham, which will nearly double its present capacity.

The gas cylinder industry is quite small and EKC, the dominant player, is the first company to tap the equity market. The overall industry is expected to grow at 19 per cent with the CNG cylinder segment growing at 26 per cent over the next few years. Its competitors are Maruti Koatsu Cylinders and Bharat Pumps and Compressors.

Rama Cylinders, a new player, is also setting up a 300,000 cylinder unit at Gandhidham. With new capacities in India, gas cylinder companies will have to depend on exports for growth. EKC has also bought a 65 per cent stake in a JV company in China.

It has already increased the contribution of exports from 16.65 per cent in 2003-04 to 34.78 per cent in 2004-05, being the first full year for the Dubai plant. EKC's major clients are companies such as Mahanagar Gas, BOC India, as well as OEMs such as Tata Motors and Ashok Leyland.

EKC lacks a consistent track record in its revenues and net profit for the last five financial years. In 2003-04, revenues dipped over 2002-03, and were marginally higher than in 2001-02.

Unlike some recent IPOs, EKC has not provided half yearly results for September 2005. If the company manages a bottom line growth of 25 per cent in 2005-06 over previous year, its EPS will work out to about Rs 9.7 at the lower price band. At this EPS, its 2005-06 P/E works out to 14, which appears high.