Last week we saw a host of multinational stocks in action with their parents making open offers for local companies. One firm that has not been in the limelight is Atlas Copco (India). The parent has already received the Foreign Investment Promotion Board's (FIPB) nod to increase its stake to 51 per cent from the current level of around 44.87 per cent. A sound first quarter show, strong parent support and good growth potential makes the stock an attractive investment bet at Rs 90.

Background

Atlas Copco India (ACIL), is part of Swedish engineering major Atlas Copco AB which is engaged in the manufacture of air & gas compressors and construction & mining equipment. The company was incorporated in 1960 and became a public limited company in 1972. The parent holds 44.87 per cent and has the FIPB permission to hike its stake to 51 per cent.  Financial institutions and retail shareholders hold the rest. Atlas Copco recently merged one of its group company Chicago Pneumatic with itself. Revathi CP is another group company operating in India which is engaged in producing blasticholes used in coal mining. Post merger, Atlas Copco has manufacturing facilities located at Pune, Mumbai and Nasik with sales and service offices spread across the country.

The parent

Atlas Copco is a global industrial group headquartered in Stockholm, Sweden. The group was founded in 1873 and currently employs more than 26,000 people and manufactures products in 14 countries across four continents. Atlas Copco companies develop and manufacture electric and pneumatic tools, compressed air equipment, construction and mining equipment, assembly systems, and offer related service and equipment rental. The products are sold and rented under different brands through a worldwide sales and service network reaching 150 countries, half of which are served by wholly or partly owned sales companies. The group operates through a number of divisions within four business areas-- compressor technique, construction and mining technique, industrial technique, and rental service. The vision of Atlas Copco is to be a global leader in each one of the above segments.

Business

ACIL has a diverse product portfolio and markets them under two brands--Atlas Copco and Chicago Pneumatic (CP). The company operates under three distinct business areas:

Compressor technique

This division develops, manufactures and markets industrial, oil free and portable compressors, oil dryers, after coolers and process compressors. This division constituted 53 per cent of the company's total sales in 2000. ACIL is the market leader in screw compressor segment with a market share of 35 per cent. These products are manufactured at its Pune, Nasik and Halol plants and marketed under both Atlas Copco and CP brands. The major users of these products are general engineering, textiles, cement and construction. This business is closely linked to growth of industrial and infrastructure sectors. The company's products were in huge demand during the Gujarat earthquake and is reflected in the first quarter performance.

Construction & mining technique

Manufacturing and marketing of rock drilling tools, rock drilling rigs and construction tools is the main activity of this division. These products are manufactured at its Pune, Nasik and Mumbai plants. ACIL has 45 per cent market share in pneumatic construction and mining tools. Almost 37 per cent of ACIL's sales are generated from this division. The company also markets some loading equipment and specialised drilling equipment sourced from other global group companies on an indent basis. This division is largely dependent on infrastructure projects such as roads, hydropower, ports, telecom etc. Almost 50 per cent of the group's requirement for pneumatic construction and mining tools are sourced from ACIL. With the golden quadrangle project taking off, considerable demand is expected to be generated in the next few years for these products.

Industrial technique

This division mainly markets a wide range of pneumatic and electric power tools and assembly systems. These tools are powered by compressed air or electricity and have applications in industries such as drilling grinding, riveting etc. They are marketed under the brands Atlas Copco, CP, Desoutter, George Renault and AEG.

Operations

The current year will be the first year of full operations of the merged entity. The results of the first quarter are strictly not comparable from the corresponding period last year. However, the interesting aspect is the sharp jump in operating profit margins to 14.34 per cent from 11.83 per cent. This shows the synergies coming from the merger in terms of rationalisation of resources and reduction of costs. The net profit increased by a whopping 162 per cent to Rs 4.61 crore which is quite high compared to the rise in equity of 56 per cent resulting in increased earnings. ACIL is almost a zero-debt company, which will help the company to leverage any future working capital requirement due to increasing orders. With the company's main thrust towards increasing exports and reduce cost through import substitution, the margins are expect to improve further in the coming quarters.

Conclusion

ACIL is the market leader in almost all its products. In the last few years, we have seen the company continuously introducing new products. Last year, we could see the company bringing down the gap between imports and exports, thereby reducing the risk of any rupee depreciation. With the parent company focussed to make Asia as one of its biggest markets, ACIL will be among the few companies to receive the latest technology. At the current level of Rs 90, ACIL scrip discounts the 2001 projected earnings by less than 10 times, which is quite cheap for a company with such a strong parent support. One can invest in the stock for good medium term returns with a limited downside.

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