Eicher: Damp offer

Eicher's minimum buyback price at Rs 150 is not likely to attract shareholders.

Since Eicher transferred its manufacturing activity to group company Eicher Motors in FY04, the former has become an investment company, earning small income from dividends, interest and profit on sale of investments. With the management looking at getting the company de-listed, it may just be the right thing for shareholders.

In late 2003, the manufacturing business of Eicher "" comprising tractors, two-wheelers, gears and engines "" was transferred to Eicher Motors, a commercial vehicles manufacturer.

Eicher shareholders received two shares of Eicher Motors for every five shares in the company. Eicher became an investment company, and that too a passive one, with Eicher Motors its major investment.

Now, the promoters plan to buy 25.16 per cent of the company, which is with the public. The minimum price of Rs 150, that the promoters will pay, is at a 64 per cent premium to the floor price, which is the average of the high and low closing prices over the past 26 weeks.

This price is also at a substantial premium to the average price over any other period. The Eicher share, which was trading at Rs 50 just six months ago, has appreciated over 50 per cent since late November, when the company announced that the promoters were considering a voluntary de-listing. On Wednesday, the share was up 5 per cent to Rs 185.60.

At the end of FY06, Eicher had investments of Rs 23.6 crore on a total balance sheet size of Rs 28.53 crore. As the largest shareholder with a 33 per cent stake in Eicher Motors, the value of this investment works out to Rs 345 crore based on Wednesday's stock price, plus some other smaller investments.

On the other hand, Eicher's enterprise value stood at Rs 207 crore on Wednesday, which means that the share is at a 40 per cent discount compared to its investment value in Eicher Motors.

At the minimum price of Rs 150, the discount to Eicher's investment value would work out to over 50 per cent. So, it is more likely that investors will not bite even at the current levels.

Shareholders will have to keep in mind that holding companies typically trade at a discount to the market value of investments. Just six months ago, Eicher was trading at a 75 per cent discount to the market value of its portfolio. So for shareholders, a price of around Rs 200-225 should be attractive enough to exit from the company.

Cement despatches: Dull December

Cement despatches of the top four players in the December 2006 quarter have grown by 5.9 per cent y-o-y to 162.7 lakh tonne. Cement despatch growth in the last quarter was curtailed mainly by December 2006 monthly despatch figures, which were more or less flat on a y-o-y basis at 55.5 lakh tonne.

Analysts point out that in December 2006, cement companies were faced with a high base effect vis-a-vis the earlier year, coupled with most players operating at close to full capacity, it led to despatches remaining flat.

Although not strictly comparable given the monsoon season, in the September 2006 quarter these four players had seen their despatches growing by 8.5 per cent y-o-y to 140.77 lakh tonne.

The cement industry appears to have once again passed on higher transportation costs to the end users. For instance, in the Mumbai market, prices at the end of December 2006 were pegged at Rs 240-245 a bag, a rise of 35 per cent on a y-o-y basis.

In the Delhi market, they were at Rs 220-225 a bag at the end of the last quarter, a gain of 30 per cent. However, cement stocks have displayed a mixed trend on the bourses over the past three months.

For instance, Grasim has gained 13 per cent over the past three months, broadly in tune with the rise in the Sensex. Meanwhile, ACC had gained 9 per cent during this period.

Cement companies are on an expansion plan in a bid to leverage strong demand conditions, thanks to heightened construction and infrastructure activity, over the medium term.

For instance, the two Holcim-controlled companies, ACC and Gujarat Ambuja, announced new capacity expansion plans of 3 million tonne each.

In addition, Grasim plans to set up a 3.5 million tonne cement plant in Orissa. But with ACC trading at 18 times and Grasim at 14 times estimated FY08 EPS, cement stocks are expensive.