The Hindu Business Line : Alfa Laval: Reject

Shareholders in Alfa Laval India need not tender to the open offer by its Swedish parent, Alfa Laval AB. Given the Indian arm's bright prospects on the back of a robust demand environment and increased exports to group companies, there appears to be a significant scope for earnings growth over the long term.

Following a lukewarm response to the previous offer price of Rs 875, the parent company recently revised the offer price to Rs 1,300. This price discounts Alfa Laval India's likely FY-08 earnings per share by about 24 times. There may be some scope for appreciation from this price in the light of the growth expectations. Furthermore, as the parent company is only looking at upping its stake to about 89.99 per cent, with no immediate intention of delisting from the bourses, shareholders could stand to gain by remaining invested.

Investment Rationale

Alfa Laval India is likely to see healthy growth given the robust demand environment across its user industries such as marine and shipbuilding, power, pharma, general engineering and automotive components. While at home the resurgence of interest in breweries, vegetable oil and ethanol businesses could spell good times for the company, export revenues could get a leg-up on increased sourcing by group companies. The company is also likely to benefit from the parent's shift in focus towards establishing a presence in emerging markets such as India.

Notwithstanding the muted revenue growth for the fiscal ended December 2006, the outlook for the current year appears positive. A 28 per cent rise in opening order backlog of about Rs 314 crore over the corresponding period last year, coupled with a proposed capex of Rs 30-35 crore towards increasing capacities and expanding the product range lend more confidence to the company's growth prospects.

For the calendar year ended December 2006, while the segment profits of the equipment division witnessed a 39 per cent growth, the process technology division, on the contrary, witnessed a 20 per cent drop in earnings. This de-growth in this segment can be attributed to project overruns and product recalls. As it was a one-time occurrence, the contribution from the process technology division can be expected to rise.

This is a conditional offer, with a minimum acceptance ratio of about 72 per cent. In this context, it needs to be noted that as a significant chunk of the company's shareholding (about 19 per cent) rests with foreign and institutional clients, their response to the offer could be crucial. Though the business prospects for the company appear sound, investors who hold on to the stock should factor the liquidity risk into their calculations if they opt not to tender to the offer.

Offer details

The offer is to acquire 4,702,500 equity shares at Rs 1300 per share representing 25.89 per cent of the paid-up equity capital of Alfa Laval India. The offer, that opened on May 7, will close on May 26. HSBC Securities and Capital Markets (India) Private Limited is the manager to the offer.

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