The Hindu Business Line : Ingersoll-Rand: Accept

PEM of about 10 times, higher than the industry average
Expansion-led growth in earnings only from FY-2009
Low comfort level on pricing and demand outlook

The parent company of Ingersoll Rand (India) has decided to acquire the residual 24-per cent public stake in the company and de-list the stock.It is in the best interest of the shareholders to exit the stock, even if the company's business prospects appear better.

Exit strategy

Shareholders having a substantial exposure to the company can offload a part of the holding in the open market using the recent upward trend in the stock. The rest of the shares can be offloaded at the book-built price to capitalise on the possible higher price determined through this offer process.

At the current market price of Rs 407, the stock trades at a price to earning multiple of 38 times its trailing twelve-month earnings. The stock might seem expensive at these valuations as most of its peers are trading in the 20-25 PEM range. However, the earnings for the past few quarters have been skewed to some extent due to the sale of its drilling business to Atlas Copco. The effect of the sale will taper in FY-07 and the earnings might reflect the real growth of the continuing businesses.

Progress report

The stock has been an under-performer in the engineering sector over the past two years due to its lacklustre performance. Over the past few quarters, when most capital goods companies reported steady revenue growth, Ingersoll Rand's was not steady even in its core business of air solutions.

The infrastructure segment was affected by the sale of its drilling business.

In its relatively new business that caters to the construction segment, margins continued to decline and it recorded a loss for the December 2005 quarter. Stiff competition from local players and pricing pressure have kept the growth of this segment under check.

Prospects

Despite the uninspiring past performance, we believe the company could see better times in the future. The business prospects appear bright as the infrastructure as well as industrial growth are expected to be good at least over the next couple of years.

Road construction will get a fresh impetus as the rural development programmes announced in the Budget take off. This could give a substantial growth opportunity for the company in the future.

As the effect of the hive-off is eliminated and the company focuses all its energy on its core businesses, it could do well.

Shareholders opting to stay invested may not only be shooting in the dark but may also be missing out on other investment opportunities in the market.

If the acquirer manages to get 90 per cent of the shares, he can go ahead with the de-listing and shareholders may have an exit route for a limited period only.

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