Atlas Copco (India): Sell



Industrial machinery maker Atlas Copco (India) has made a voluntary offer to delist the company's shares from the BSE and Pune Stock Exchange.

The floor price for this offer is Rs 1,426 and the company has provided an indicative offer price of Rs 2,250. Current market price is Rs 2122.

We recommend that investors consider selling the shares of Atlas Copco (India) in the open market for the following reasons: One, the stock witnessed a sharp rally of 30 per cent in the four months since the proposal was announced. This has led to the stock's price-earnings multiple move sharply to 30 times the trailing 12-month earnings, placing it at a stiff premium to peers such as Elgi Equipments and Ingersoll-Rand. This may be a good time to take profits. Two, past experience suggests that delisting offers are not always successful as the company may reject the discovered price if it turns out much higher than floor price. Three, tendering to the company attracts capital gains tax resulting in delisting offers being met with poor response. Historical evidence also suggests that if the delisting falls through, the stock plunges, thus impacting all investors. Given the above risks, investors may be better-off selling the shares in the open market before the offer closes. The share has seen a sharp pick-up in volumes in recent times; this situation may reverse too once the offer closes. A very high discovered price, which is also accepted by the company, remains a risk to our recommendation.

Strong growth

Atlas Copco (India) is a subsidiary of Sweden-based Atlas Copco AB. The Indian unit manufactures air and gas compressors, construction and mining equipment and industrial tools and commands a major market share locally. Atlas Copco's strong parentage and brand visibility ensured that it stood its ground in the slowdown in 2008. In fact, the company did not witness any decline in earnings during 2008-2009. For the full year ending December 2010, sales expanded 32 per cent to Rs 1,272 crore, while net profits jumped 75 per cent to Rs 86 crore. Compressors and other industrial equipment saw a strong revival and accounted for 60 per cent of revenues. The infrastructure equipment segment too may see improved volumes in the upcoming year with eleventh plan coming to a close.



Bright prospects



The parent derives a chunk of its business from Asia and Australia, with India and China being key markets in Asia. Clearly, the Indian market is an important one for the parent. Atlas Copco's (India) prospects remain bright and the company's share has during boom phases of the business cycle, commanded premium valuations. The bid opens on March 7 and closes on March 11. The final announcement on the discovered price would be made on March 23, post which the company would announce its intention to accept such price or reject the same.

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