Sundram Fasteners Limited (SFL), one of the largest manufacturers in the fastener industry, recently acquired the precision forging business of Dana Spicer Europe for a total consideration of GBP 1.5 m (Rs 12 crores). The division is located at Northumberland UK and has been hived off as a new company called Cramlington Precision Forge Ltd (CPFL) and would be a fully owned subsidiary of SFL. The company has a whole array of products that seem to complement SFL's product mix.
From the look of it, SFL seems to have struck a good deal. The acquired forging business is a profitable one and had raked in revenues of GBP 3 m (Rs 24 crores) till November 30, 2003. To put things in perspective, this accounts for 5.2% of SFL's FY03 revenues. Therefore, even if one considers the yearly sales of the divisions to be GBP 3 m and assumes the market cap to be equal to the amount that SFL forked out i.e. GBP 1.5 m, the market cap to sales ratio for the acquired business turns out to be 0.5x. Contrast this with the ratio of 2.5x (FY03) that the acquiring company i.e. SFL enjoys and hence this leads us to believe that the acquisition would not have come at a better price for SFL.
Moreover, the forging business is operating at only 50% of its total capacity and hopes to push up its revenues to GBP 6 m (Rs 48 crores) in the next two years by making use of the unutilized capacity. Not only this, a clutch of blue chip companies like MAN, DAF Trucks, Albion Automotive, Scania and Parker act as customers for the forging division. The division also has a three-year supply agreement with Dana Spicer for supply of precision forgings.
The current acquisition bodes well for SFL, as it recently commissioned a new project for small forgings in Pondicherry with an initial investment of Rs 1.6 bn. Therefore, the possibility of the company utilising this plant to serve the clients of CPFL and take advantage of the lower labour cost prevailing in the Indian markets cannot be ruled out. The company can also look forward to sell CPFL products to its Indian customers. But the 30% customs duty on imports is likely to act as a possible hindrance.
The above chart shows the exports performance of SFL, which we believe would improve post the current acquisition. With the addition of CPFL, SFL now has three facilities outside India. While the company already has a subsidiary called TVS Autolec Ltd in Malaysia, which manufactures oil and water pumps, the biggest ace in its sleeve is the factory that SFL is setting up in South China to sell and manufacture high tensile fasteners. The factory, which will be set up through a 100% subsidiary company named Sundram Fasteners (Zhejiang) Limited, is slated to start production by around first half of 2004 and has an installed capacity of 6,000 MT. The Chinese subsidiary may also export fasteners to nearby Asian markets apart from meeting the requirements of the Chinese domestic market.
The stock of SFL is currently trading at Rs 1133, implying a P/E of 21x of its annualised 1HFY04 earnings. If one takes into account the company's overseas forays, there could be a significant upside in both the topline as well as bottomline growth of the company and could justify the current high valuations levels.
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