Shareholders of engineering solutions provider Alfa Laval (India) can exit the company. The stock has delivered 140 per cent in the last one year, thus pushing its valuations up to 41 times its trailing 12-month earnings at the current market price of Rs 2,875. This is way above the valuations enjoyed by other capital goods players. The extraordinary gains in the last one year coupled with expensive valuations make a case for exiting the stock.
The company's sales have expanded at 6.4 per cent, compounded annually over the three years ending December 2010 to Rs 836 crore, while profits grew at 5.6 per cent to Rs 108 crore. Even if earnings growth do pick up, they are unlikely to keep pace with current valuations.
The offer
The Swedish parent of Alfa Laval decided to go for a delisting of its Indian unit, after implementation of new regulations in India that require at least 25 per cent public shareholding. The promoters currently hold 88.7 per cent in the company and have received the consent of shareholders for the delisting.
The offer bid opens on February 15 and closes on February 22.
The floor price for the offer is Rs 2045 and the promoters have indicated an offer price of Rs 2850. The final offer price, though, would be fixed based on the price at which the maximum number of shares are tendered.
Shareholders can either sell their shares in the open market now or tender their shares under the delisting offer. While it is possible that the final offer price be much higher than the indicated price, it may be more tax efficient to sell the shares in the open market. Shareholders then will have to shell out either nil tax, if held for over one year or will attract tax at a concession rate of 15 per cent, if held over the short term.
In contrast, under a delisting offer, the short-term gains are charged at your normal tax rate and the long term capital gain are taxed at 10 per cent without indexation or 20 per cent with indexation.
The company
Alfa Laval makes heat exchangers and equipment that separate fluids, solids and gases. The company's equipment are used in a wide range of industries ranging from diary, breweries, chemicals, pharma and oil. While there are peers who sell some of these products, Alfa Laval's offering is much wider and cannot be strictly compared with local listed plays.
The company withstood the 2008 slowdown well and managed to expand sales in 2009. However, the euro zone crisis may have hurt prospects later as sales dipped for the calendar year ending December 2010. While sales and profits bounced back for the nine months ending September 2011, steep increase in raw material costs pulled down profits in the September quarter, over a year ago.
Raw material costs have been steadily climbing in 2011 and rose to 67 per cent of sales for the nine months ended September 2011 compared with 57 per cent in the year ago period. EBITDA margins declined to 19 per cent from 23 per cent in the above period.
Higher commodity prices besides rupee depreciation appear to have hurt margins. The company imports a good proportion (40 per cent) of its raw materials. Cost overruns and delays in one of its large orders in Vietnam may also have led to margin erosion.
Alfa Laval's order book, as of June 2011, was Rs 700 crore, little less than sales of Rs 836 crore in 2010. While Alfa Laval is likely to continue to benefit from the parent's support in terms of orders and technology, lack of major expansion in its user industries may impede any fast track growth. But if the promoters do not accept the final delisting price, leading the company's stock price to decline, we shall review the stock.