Numeric Power: Hold

The acquisition of Numeric Power System's uninterrupted power supply (UPS) business by French player Legrand, leaves shareholders bereft of the company's key business.

The silver lining in this sale is the high valuation (18 times trailing 12-month earnings) that Numeric Power managed to receive for its UPS business. With over Rs 800 crore expected from the sale, the company has promised to return some money to shareholders through a special dividend. However, it is the quantum of this dividend which will decide whether the deal is good for the shareholders. They may hold the stock until such time and then exit it. Past experience with asset sales suggests that the stock markets do not assign full value to the cash lying with a company.

The sale agreement leaves the company with a nascent green energy solutions business and a castings subsidiary, both of which have a long way to go before providing meaningful returns to investors.

Nascent businesses

Numeric Power's sales expanded a healthy 15 per cent annually in the last four years to Rs 509 crore in FY-11, while net profits expanded 19 per cent to Rs 41 crore. Profit pressure, though, has been evident in the last three years with the company's profits in FY-11 lower than the best year of FY-08. Although the power deficit situation in the country meant higher sales of UPS, increase in unorganised players has been a constant threat. The company's entry into solar power solutions at such a time, thus, seemed a good complementary fit, as back-up using solar power was not something that unorganised players could offer.

Numeric, from thereon, has been offering solutions for solar roof tops and solar farms, thus focussing on the entire gamut of solar solutions. While the business may hold potential, it is not without risks, given the high dependence on import or inputs and the volatile price of the solar chip. Until now, the UPS business provided some cushion to try out the new fangled plans.

Valuations languishing

Numeric Power did not receive any income from its solar subsidiary up to FY-11. Its castings subsidiary, Amex Alloys, acquired a year ago, made Rs 19.5 crore of sales and Rs 0.3 crore profits in FY-11.

The management, in a recent media report, stated that it will manage Rs 100 crore of sales in FY-13 from the non-UPS business it is left with. This means that the solar business has to ramp up considerably. The recent Jawaharlal Nehru National Solar Mission has seen a plethora of players enter this field, thus increasing competition.

Stock markets too have not assigned high value to green energy players. This could be one reason for Numeric Power's valuations languishing in the 7-8 times price-earnings range.

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