Alfa Laval: Good price to exit

Indicative delisting price announced by Sweden-based parent attractive

The share price of Alfa Laval (India) was trading at about Rs 1,500 in August last year, when news of a possible delisting offer cropped up; the official announcement came mid-September. Since then, in just four months, the share price has risen sharply and is now a shade below the indicative delisting offer price of Rs 2,850 per share. The question: Should investors exit and if so, at what price?

“While a slight premium to the indicative price cannot be ruled out in the bidding process, it makes immense sense to participate in the offer,” Ajit Agrawal, analyst at Unicon Research, wrote in a recent note on the company.

Some experts, though, believe a marginally higher indicative offer price would have been better. “Historically, delistings have happened at about 40 times (price to earnings, or PE, multiples). Even if we consider an EPS (earnings per share) of Rs 80 for the year ended December 2011, the fair price works out to Rs 3,200. Investors should participate but could bid at higher price,” says S P Tulsian of sptulsian.com.
 

FAIR OFFER
Current price (Rs)	2,835.60
Indicative offer price (Rs)	2,850.00
Market cap(Rs crore)	5,150.00
Price/Book Value (x)	12.26
PE (x)*	38.51
Dividend yield (%)	1.06
*PE is based on annualised EPS of last nine months ended Sept' 2011 (year ending is December)              Source: CapitaLine Plus

Overall, considering the stock’s valuations and the company’s growth prospects, exiting the stock would make good sense at the indicative offer price.

The offer...
The guideline for minimum public shareholding in all listed companies is at least 25 per cent by June 2013. This has led many companies to think about delisting. Alfa Laval, too, is looking to delist its Indian arm, as it holds 88.77 per cent stake. The bidding process will commence from February 15 and close on February 22. The remaining 11.23 per cent of total holding is with the public — most of the shares are held by retail investors, as the institutional holding is less than one per cent.

The foreign parent proposes to acquire the public shareholding through a reverse book building process, wherein it has set a floor price of Rs 2,045 and an indicative offer price of Rs 2,850. While these are not binding, investors can choose to bid at a higher price.

...appears lucrative
From a pure valuations perspective, the indicative offer price is lucrative. At the indicative price, the stock is valued at 38 times annualised earnings for the year ending December 2011. Compared to the sector’s PE valuation multiples of 10-12 times forward earnings and even the Sensex’s PE of 14 times, the indicative price is attractive. The same holds true even from the price to book value perspective, at 12 times (based on CY2010 value).

However, valuations should not be looked in isolation but also from the growth perspective. Over the past 10 years, Alfa Laval India’s revenues and net profits have risen at a compounded annual growth rate of 14 per cent.

Sound
But, if investors want to stick around, there’s little to worry. The long-term business prospects remain good. Consider this.

Based in Sweden, Alfa Laval’s parent is one of the leading engineering companies in the world, with the core of its operations based on three key technologies — heat transfer, separation and fluid handling — with great significance for industrial companies. The equipment sold by Alfa Laval help in separating liquids, gases and solids.

In India, the listed subsidiary provides products and services to the power sector and industrial (foods & beverages, pharma, biofuels, oil & gas, metals, paper, water treatment) clients. Thanks to the support of its parent, which allows it to manufacture equipment using all the three key technologies, it has emerged as a known player in the industry, with one of the widest range of offerings.

Financially, too, Alfa Laval (India) has done well. Apart from decent growth rates, it is debt-free, generating a high return on shareholder’s funds, of almost 27 per cent. It has been consistently able to grow its earnings and revenues, year after year, at a decent pace. And, given the long-term growth potential in the country, sustaining healthy growth shouldn’t be an issue for Alfa Laval (India). The confidence stems from the company’s plans to expand its business in this country by investing in fresh capacities and launching new products.

However, there is a near-term risk. Most experts believe the probability of the delisting going through is high. However, if the offer fails to garner huge response and the parent does not accept a higher price (higher than the indicative price), the share prices, which have risen close to the indicative price, could drop to realistic levels or near the industry valuations.