Welspun: Weaving success

Welspun's buy gives it access to European furnishings market

Home furnishing manufacturers are getting quite serious about their international footprint. After GHCL's two recent acquisitions, one each in the US and the UK, Welspun India has now acquired 85 per cent stake in UK's towel brand Christy.

Welspun has acquired 85 per cent stake in Christy for about Rs 113 crore, valuing the company at Rs Rs 132.6 crore. Christy had revenues of Rs 300 crore and an operating profit margin of 8-10 per cent according to the management. It sells its products under the Christy brand and also manufactures own-label products for retailers.

Besides retail stores in the UK, it operates 98 concessions, has 22 owned stores and also some international presence. While GHCL had acquired distribution through Rosebys, Welspun has bought UK's largest towel manufacturing plant as well as distribution.

With this acquisition, Welspun will gain access to the European market along with its retail presence, design skills and a strong brand. Welspun will also aim to leverage Christy's relationships to sell Welspun towels, bed linen and other home furnishings.

Welspun has presence in several US value retailers such as Costco and Wal-Mart, while Christy will provide access to premium retailer Bloomingdale's. Welspun is likely to bring some of Christy's sourcing requirements to India too.

In FY06, Welspun India posted a healthy top line growth of 37 per cent to Rs 653.7 crore, but its operating profit growth was stunted at 14.3 per cent. To its credit, Welspun managed to reduce raw material costs as a percentage of sales by 640 basis points y-o-y to 34.17 per cent in FY06.

Other expenditure increased by 72 per cent on higher power costs and new capacities coming onstream. As a result, operating profit margin fell 380 basis points to 18.8 per cent and its EPS declined by 8 per cent in FY06.

Welspun is increasing its capacity and as a result, interest and depreciation are likely to remain high going forward. Its trailing P/E of 16.5 times indicates that the market is expecting reasonably large profit growth going forward.

Bayer Diagnostics: Synergy push

Siemens' open offer for Bayer Diagnostics at Rs 629.45 is at 21 per cent premium to six-month average price before the announcement.

After the open offer, a result of Siemens AG acquiring Bayer's diagnostics business worldwide, the Bayer Diagnostics stock has appreciated 25 per cent.

Bayer Diagnostics, which sells and services medical equipment, reagents, instruments and monitoring strips, has a poor track record. Net sales and net profit have increased at 5 per cent CAGR since 2000, and its growth in recent years too is below average.

But in terms of valuation, even at the open offer price, the Bayer Diagnostics stock is not expensive at a trailing P/E of 16 times, considering that the company has good potential.

The synergies with Siemens' medical business are likely to result in better returns for Bayer Diagnostics shareholders going forward. Shareholders of Bayer Cropscience, which owns 18.33 per cent stake in Bayer Diagnostics, will make an additional pre-tax profit of Rs 3.9 per share following the sale to Siemens.

Hotel Leela: Room with a view

With demand for hotel rooms far outstripping supply last fiscal, it's not surprising that Hotel Leela, a player in the premium segment, has turned in strong numbers for FY06, with revenues up 27 per cent y-o-y at Rs 327 crore.

Operating profit has risen a smart 38 per cent to Rs 159 crore, accompanied by a margin expansion of nearly 400 basis points to almost 49 per cent. And, thanks to lower interest outflows, the increase in net profit has been even better.

Hotel Leela has benefited tremendously from the shortage of rooms in the last couple of years in Bangalore, where its average room rates are one of the highest in the country.

Foreign tourist arrivals should continue to grow at 10 per cent per annum for the next three or four years at least, so the demand for rooms should remain strong with occupancies sustaining at 80 per cent levels.

There has been a slight delay in the expansion of the Bangalore property, where 120 rooms are being added, though some of the Mumbai property's expansion""where a new wing of 144 rooms has come up""will be reflected in the current year's numbers. Once the expansions are complete, any increase in room tariffs would flow straight to the bottom line.

While the outlook for the industry remains bright, competition in markets such as Mumbai, which contributes a chunk to Leela's revenues, could put pressure on room rates.

The overall increase in tariffs in the last two years has been so high, it is difficult to see them rise further. Thus, current valuations of nearly 21 times FY07 estimated earnings, factor in RevPar (revenues per available room) of around 20 per cent for the next couple of years.