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Given the strong demand prospects, investors with a long time horizon shouldn't really bite the bullet on Bosch's open offer for MICO.

Robert Bosch Gmbh's open offer for over 6.4 million shares of MICO (Motor Industries Co Ltd) representing 20 per cent of the total paid up share capital of the latter has to be assessed carefully by investors.

Most analysts agree that the time frame for investment remains crucial. While investors with a time frame of about two years could well hold on to their investments, those with a short-term horizon could start booking profits at the offer price of Rs 4000. At the same time, the current price level does not make a great entry point for fresh investors.

MICO's open offer price of Rs 4000 is at over 15 per cent premium to the six month average price till the date of announcement of the offer. Moreover, its all-time high at Rs 3687 also remains about eight per cent lower than the offer price.

Considering that the promoter holding in the company stands at 60 per cent, the minimum acceptance ratio would be 50 per cent.

In other words, even if all the minority shareholders tender their shares in the open-offer, a half of the holdings will be bought back by the company at the said price. At the end of March 2007, institutional holdings in the fund stood at 28 per cent.

The demand environment for MICO's products appear strongly positive. MICO is at present the largest manufacturer of diesel fuel injection equipment with an 80 per cent market share. It also has a 65 per cent market share in spark plugs.

Key user industries namely tractors and commercial vehicles have grown strongly in FY07, with the latter posting 33 per cent growth. While CV and tractor growth is widely expected to moderate this fiscal, the strong technological base which its parent company provides and its virtual dominance in the niche segment should make it the chief beneficiary of not only the reasonable growth in the segment but also other emerging trends in the automobile space.

The increasing diesalisation of cars is one such example. According to some estimates, the diesel segment which comprises about 27 per cent of the car market is expected to reach 35 per cent by 2010.

Moreover, the company has invested heavily in the development of an indigenous common rail system (CRS) which is expected to hold it in good stead.

According to some estimates, CRS will occupy close to 60 per cent of the diesel engine market in the next few years.

While the demand prospects appear bright, the massive ongoing capex plan could continue to keep profitability under stress. MICO has experienced margin pressure in the past, too, due to higher raw material costs and changes in the regulatory norms for CVs which has resulted in a shift to distributor pumps from in-line pumps with higher import content. 
 

FINANCIALS
(Rs crore)	Mar-07-Q	Mar-06-Q	% Change
Net sales	1070.11	923.07	15.93
Other income	27.02	6.22	334.41
Operating profit	231.24	207.06	11.68
PAT	202.96	163.60	24.06
Extra. Items	53.60	8.20	553.66
Net profit	183.80	114.90	59.97
OPM (%)	21.08	22.28	-1.20
PAT M (%)	18.97	17.72	1.24

In the March 2007 quarter too the company faced a pressure on operating margins which contracted 120 basis points. Sales were up 15.93 per cent thanks to the strong performance of the CV and CRS segments, yet, operating profits were up only 11.68 per cent.

The 60 per cent growth reported in net profits was boosted by an extra-ordinary gain of Rs 54 crore arising out a sale of investments. Excluding this, net profits were up 24 per cent, again, due to a substantial reduction in depreciation provision.

After achieving sales of Rs 3783 crore and profit after tax of Rs 396 crore last fiscal, analysts are hopeful of a healthy sales growth of about 25 per cent this year. However, margin pressure could continue till the full benefits of the capex plan start flowing from 2009 onwards, they reckon.

Over this year and the next, the company would invest about Rs 800 crore in augmenting its capacity.

The stock at present trades at Rs 3880 which translates into 23.5 times estimated CY2007 earnings and about 20 times CY2008 earnings. While its valuation is at a premium to other auto ancillary players in the market, analysts feel it is well deserved considering its superior engineering and technological capabilities.

Although MICO remains a good investment with a time horizon of about two years, the price currently at Rs 3880 is quite high for a prospective investor to enter.

As Umesh Karne, senior research analyst, Emkay Shares and Stock Brokers puts it, " I would recommend investors to hold on to their investments rather than tender their shares at the offer level given the strong long term prospects." At the same time, analysts recommend prospective investors to desist from making fresh investments.

"After the expiry of the offer period, when the price could be expected to correct, investors could consider buying," says an analyst.

At the same time, some analysts believe that for short-term investors the offer price may be a good point to exit.

As Vaishali Jajoo, research analyst, Angel Broking puts it, "I feel that it would be prudent for investors with a short term horizon to book profits at present levels".