Wipro Infra: Core push

Wipro Infra's Swedish buy is well-timed with infrastructure expenditure on the rise

Wipro has taken the acquisition route in the technology sector, having bought stakes in six overseas companies in the IT and BPO market over the past year. It announced an acquisition in the infrastructure engineering space on Thursday.

Wipro's wholly owned subsidiary, Wipro Infrastructure Engineering (WIN), has taken over Swedish-based hydraulic components and solutions provider Hydrauto Group AB for $31 million (approximately Rs 143 crore), in an all-cash deal.

The Swedish company's turnover amounted to approximately $112 million or Rs 515 crore in CY05, implying an enterprise value to trailing sales at a reasonable level of 0.27 times.

While software services and product sales account for nearly 93 per cent of Wipro's consolidated sales, Wipro also has presence in other businesses such as consumer care and lighting, infrastructure engineering and medical systems.

WIN focuses on the hydraulic market, mainly the mobile construction equipment business in India and Asia. It also manufactures cylinders and truck hydraulics and also distributes hydraulic steering equipment and pumps, motors and valves.

Hydrauto is understood to be a large global player in cylinder manufacturing, which are used for container handling machines.

Hydrauto's hydraulic components and solutions are largely used in material handling equipment, construction and earth moving machinery industries by European companies.

WIN had a turnover of about $57 million in FY06 and this acquisition would add more than twice that amount. WIN and Hydrauto have complementary engineering skills, which Wipro can leverage in both Asia and Europe.

Since infrastructure expenditure is on a rise, this acquisition seems well-timed. WIN recorded a revenue growth of 32 per cent y-o-y in FY06, with a 37 per cent growth in revenues from hydraulic cylinders and tipping gear systems.

But as the share of its other businesses (where WIN belongs) in consolidated revenues and operating profit is just 3 per cent and 2 per cent respectively, this acquisition is unlikely to make a major impact on the company.

As a result, there was little action in the Wipro stock after the news. The stock trades at about 28 and 21 times estimated FY07 and and FY08 earnings respectively, which is similar to the P/E multiples of Infosys and TCS.

United Phosphorus: Right formula

In recent times, United Phosphorus (UPL) has worked hard to broad-base its revenues by acquiring companies and products.

This seems like a good strategy, considering that its domestic agrochemical business, where it has a 8 per cent market share, is growing in single digits.

With the recent purchase of the bensulfuron-methyl business from DuPont worldwide except in the Asia Pacific region, UPL has added an important herbicide in its portfolio. Bensulfuron-methyl, an aquatic herbicide, is used in the crop protection of rice.

The company will pay $15 million for the product, which is estimated to earn a margin of 50 per cent. Though the revenues of this product are not available, the payback period should not be more than two-three years according to analysts.

UPL also announced that it will begin manufacturing two insecticide products for the $350-million Ishihara Sangyo Kaisha (ISK), Japan. It also signed a three way JV where it will have 45 per cent stake, while ISK will own 45 per cent, and 10 per cent will be held by Mitsui, Japan.

This new company will develop and distribute ISK's products in India. Unlike UPL which is a generics player, more than 90 per cent of ISK's products are still under patent. This alliance may also look at other countries besides India.

Just last month, UPL had acquired three products""herbicidal active ingredient asulam, and two insecticide products trichlorfon and oxydemeton-methyl (Metasystox brand) from Bayer CropScience.

Earlier in August, it had acquired South Africa-based Cropserve, which would provide the company distribution in three African countries. In February, it had acquired Advanta's seeds business.

Its acquisition strategy is expected to see its revenues rise by over 30 per cent y-o-y in FY07 to Rs 2200 crore. In Q1 FY07, its inorganic growth (three acquisitions after June 2005 excluding Advanta) had helped its top line improve by 18 per cent y-o-y and an operating profit growth of 19.2 per cent.

Though the UPL stock went up to about Rs 260 on Wednesday after the announcement, it fell to Rs 239 on Thursday. The stock trades at about 17 times estimated FY07 earnings, which seems reasonable considering growth.