The Hindu Business Line : Alfa Laval: Buy

A good order-book position, higher prospects for outsourcing from the parent company and demand in new areas such as biotechnology and pharmaceutical companies could sustain growth.

Alfa Laval also has a record of paying out handsome dividends. Strong cash flows, debt-free status and minimum capex requirement indicate that the payout to shareholders might continue to be high.

A dividend yield at around 5 per cent also provides cushion against a sharp downside in the stock.

Alfa Laval makes process equipment such as separators, decanters and dryers, which are used in various applications such as vegetable oil processing, breweries and ethanol production.

The relatively newer areas identified are pharmaceutical and biotechnology applications, wastewater management and sewerage treatment.

The company had bagged orders from companies such as Biocon, thus establishing a presence in the nascent field of biotechnology.

Outsourcing: Bright prospects

The parent company has been increasing its offtake of decanters and separators from its Indian subsidiary. In 2003, the offtake from the parent alone increased 45 per cent.

Alfa Laval has been designated as a manufacturing base for certain products such as decanters and separators. This segment constitutes close to 30 per cent of the sales of Alfa Laval AB (the parent company).

The parent company is now looking at sourcing engineering services too in addition to products and equipment. The services would be primarily in projects business such as erection and commissioning. This would provide an additional revenue stream.

Currently, services, including spares, contribute close to seven per cent of the company's turnover and exports 44 per cent.

A steady euro against the rupee will also benefit the company as its exports are primarily in euro. Alfa Laval has also been increasing its non-parent exports by taking up projects independently.

Comfortable order-book

Order backlog as on March 2004 was Rs 222 crore, 59 per cent of the revenue for 2003. Order booking rose 19 per cent in the January-March 2004 quarter against the corresponding previous period.

The usual cycle time for execution is six-eight months. The order booking has been particularly good for the projects business both domestic and exports.

Business prospects

Alfa Laval is a strong player in almost all the segments it operates in. It has a good presence in the vegetable oil processing and breweries segment.

Last year, the growth was primarily fuelled by increase in demand in the brewery and vegetable oil segment. In the brewery segment, the growth came form expansion and modernisation projects. The company has a dominant position in the brewery segment.

However, the growth potential may in future be from newer areas such as fuel ethanol and life-sciences segment. The company has also introduced more efficient equipment for refrigeration systems.

The Government proposes to increase the ethanol-blending ratio in automobile fuel to 10 per cent from 5 per cent. This is expected to open up good opportunities in the segment. Moreover, the export prospects for ethanol-blending equipment are bright. Alfa Laval competes with Praj Industries in this segment.

Financial performance

Alfa Laval has been recording consistent growth over the past four/five years. The process equipment division contributes 62 per cent of the turnover and is the fastest growing segment.

The return ratios for the businesses are high. The return on shareholder funds works out to over 40 per cent.

Considering the strong fundamentals, good dividend yield and growth prospects, the valuations appear attractive.

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