Atlas Copco (India) Limited (ACIL)

An Investment Idea

Atlas Copco, 83.8% subsidiary of Atlas Copco AB, Sweden, has reported decent performance for Q3 CY 2007. Net Sales grew @ 23.9% to Rs. 240 crore (Rs. 193.70 crore) led by 28.2% growth in industrial segment (comprises 65.8% of total sales) sales of Rs. 155.66 crore (Rs. 121.38 crore) and 20.2% growth in Construction and Mining segment (comprises 34.2% of total sales) to Rs. 80.93 crore (Rs. 67.33 crore). OPM% dropped marginally to 16.9% (17.4%). However, PBT (before extra ordinary items) rose by 22.5% to Rs. 33.84 crore (Rs. 27.6 crore). However, voluntary retirement write off of Rs 40 lakh and higher effective tax rate of 37.4% arrested growth in PAT to Rs. 20.5 crore (Rs. 17.4 crore) – growth of only 17.8%.

For 9 months ended September 30, 2007, net sales grew by healthy 28.2% to Rs 683.70 (Rs 533.20 crore) but OPM% dropped 15.9% (19.3%) due to increase in material cost and other expenditure. Consequently, PBT (before extraordinary items) rose by only 7.1% to Rs 92.2 crore (Rs 86.1 crore). However, net extra ordinary income of Rs. 9.6 crore (NIL) lifted PAT up by 18.9% to Rs 64.6 crore (Rs 54.3 crore).

Currently, company is revamping its manufacturing facilities in Pune & Nashik and rationalizing production

centres for its two main businesses – Compressors and Construction & Mining to create local centres of competence. Following rejig

• Company will manufacture entire range of reciprocating, rotary and turbo compressors at its Pune facility. Five new lines will be added to its existing six lines and another bay is in offing for manufacture of large compressors.
• Entire production of construction and mining technique division will be shifted to Nashik. ACIL is setting up new unit for production of compactors and pavers at Nashik at total cost of Rs 17 crore.

Modernization and enhancement of capacity at Pune and Nashik will cost Rs 52.5 crore in aggregate. In future, ACIL will also focus on new businesses such as road construction, hospital and marine segments. Construction and mining segment is expected to benefit significantly from increased investments in power, infrastructure projects and mining of coal & other minerals. Also, it will stand to gain from coal-bed methane gas lined up by Reliance, Essar Oil & ONGC. Extraction of gas will provide two-edge benefits – for extraction of gas, drilling equipments in mining part of the business, while compressor to pump in the gas. Growth in compressors business will further be driven by acquisition of CNG business of Intermech, New Zealand will give much needed push in lucrative area of CNG compression business.

At CMP of Rs 993/-, the share (Rs 10/-) is trading at 26.7 times its CY 2007 expected EPS of Rs 36.9 and 16.9 times CY 2008 expected EPS of Rs 58.3/-. Considering growth expected in infrastructure sector (ports, road, mining, etc) and corresponding growth in infrastructure equipment space, demand for company’s products profile will be significant in years to come. Hence, we recommend to “BUY” the share at CMP.

----- With due apologies and full credits to Geojit