Not all gas

POUND WISE

BOC India's business seems to be on a strong footing thanks to the expansion in the steel sector.

Ever heard of the global players like Air Liquide, Air products & Chemicals (US), Praxair (Europe), Linde AG and BOC Group Plc? Did you know how important the existence of these players is in our life?

The oxygen cylinders in hospitals, which save people's lives and LPG that people need as their cooking fuel are provided by these companies. Where there are already few players globally, on March 7, 2006 there was the striking news that Germany-based $7.89 billion Linde AG "� industrial gases and engineering behemoth "� was acquiring the $26 billion gas giant BOC Plc for $14.4 billion.

What does this global takeover have to do with Indian investors? The answer: following the takeover, according to Sebi regulations, Linde AG will have to make a mandatory 20 per cent open offer to the public as it will own and control BOC group Plc's 54.8 per cent Indian subsidiary "� BOC India.

Though the company were not available for any comment as to when the open offer is to come, analysts expect it to happen shortly (within three months) subject to the approval of US and EU authorities.

According to the Sebi-prescribed formula, the open offer should be made at the higher average price of the past six months or the past two weeks, which works out Rs 169.07 for the BOC India stock.

In a single day, that's on March 7 "� the day the news broke, the stock gained about 3 per cent. Thereafter, it corrected in line with the volatility of the market.

Analysts, however, say, whether there is any open offer or not, given its business, BOC India is a potentially good stock to 'Hold'.

Vikas Shah of Emkay Shares and Stock Brokers says, "Investors with a long-term horizon of two-three years should hold on to the stock as the prospects of BOC India are good. Short-term investors can exit if the open offer is priced between Rs 230 and Rs 250." Raveendra H C of Angel Broking adds, "Long-term investors can expect an annual return of 15-18 per cent for the next two years."

BOC India has given a return of 82.2 per cent on a yearly basis, compared with the Sensex gain of 63 per cent. At Rs 162, it trades at a P/E of about 13 times FY07E earnings.

A seven-decade-old company, BOC India - the Indian subsidiary of BOC Plc has well-entrenched presence with a dominant market share and strong cash flows in the country. The company manufactures various types of gases such as nitrogen, oxygen, krypton, xenon argon, neon, hydrogen, helium, carbon dioxide, acetylene and speciality gases applicable in various industries.

A major portion of its revenues "� about 45-50 per cent "� comes from the steel industry. After years of lacklustre performance, the company has witnessed a revival in its growth prospects in the last one and a half years, thanks to new steel-making capacities locally and worldwide due to buoyant market conditions for the steel sector. It registered the highest-ever turnover of Rs 424 crore and a net profit of Rs 45.6 crore in 2004-05.

With rising domestical consumption of steel due to the Indian government's thrust on infratstructure and booming real estate activities, the demand for industrial oxygen is expected to be robust, going forward.

Raveendra shares the same view: "The steel industry is expected to grow at 15 per cent in atleast next two years and the companies are operating at higher operating rates. This calls for a higher demand for oxygen, and BOC India contributes handsomely to the total industry growth. Thus, BOC is expected to grow at over 20 per cent in the same period."

The national steel policy has also set a production target of 60 million tonne steel by 2010 and to increase it to a level of 100 million tonne by 2018. This augurs well for BOC India.

Further, there will be additional demand coming in from other industries like auto, food processing, refineries and healthcare -- the areas into which the company has diversified.

After aligning its businesses with the parent company, BOC India derives about 75 per cent of its revenues from industrial and special products (ISP) and the balance from the process gas solutions (PGS). While ISP covers sales of its products in cylinders, PGS focuses on bulk supplies of industrial gases from on-site plants or by pipeline as well as delivery of liquified gases.

ISP business gives good volumes and better margins if performance of this segment in the parent company's total business is calculated. Globally, BOC Plc derives a majority of the operating profit (about 50 per cent) from ISP, though the contribution to the turnover is 37 per cent.
 

FINANCIALS
	9 months ended			Chg
	FY05	Dec-04	Dec-05
Net sales	384.70	271.50	363.10	33.80
Operating profit	66.10	50.30	59.70	18.60
OPM	17.20	18.50	16.40	-
Net profit	26.10	18.10	30.00	65.70
NPM	6.80	6.70	8.30	-
EPS	5.50	3.70	6.10	65.70

For the nine months ended December 2005, BOC India reported 33.7 per cent growth in net sales at Rs 363.12 crore. Its operating profit increased by 18.6 per cent to Rs 59.72 crore. However, operating margins declined by 210 bps to 16.4 per cent. Again, net profit grew 67 per cent to Rs 30.02 crore mainly on the back of sales of surplus real estate assets.

Benefits from the synergies of global parents will trickle down to the subsidiaries as well and nothing can stop BOC India to capitalise on the opportunities. Post-acquisition, the combinantion of Linde AG and BOC Plc will create market leader ship as they will together garner a market share of 22 per cent in $53 billion global gases market.

Linde is the fifth-largest industrial gases company and possesses strong engineering skills and has access to sophisticated technology for liquification of gases. However, it does not have a wide presence in Asia "� the fastest-growing region in the world.

On the other hand, the British gas major BOC Plc "� the second-largest gas company in the world next only to France based Air Liquide SA"� is spread across 50 countries and derives more than 30 per cent of revenues and 40 per cent of profits from the Asia-Pacific region, predominantly China and India.