Stock Watch- SAB NIFE
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Powerhouse in the making
The merger of HBL Limited with Sab Nife Power will create a new powerhouse in the industrial batteries market, informs
Sameer Chavan (The Smart Investor BS)Aug.30 - Sept 05
The batteries market in India is largely dominated by the troika of Exide Industries, Amara Raja Batteries and Sab Nife Power. Exide and Amara Raja have infringed on each other's territories. The former has got into valve regulated lead acid (VRLA) batteries, hitherto Amara Raja's domain. And Amara Raja in turn is about to test the might of Exide in its strong hold, the auto batteries segment. Both these companies have been market favourites for quite some time.
The third, Sab Nife, has been waiting in the wings. Though the company has caught the market's attention, it is still not looked at as being in the same league as the other two. Firstly, because Sab Nife is much smaller than the other two. The other reason could be that the company does not have the products which are perceived to have high growth potential in future. But this is all set to change and this will make Sab Nife a company to reckon with in future.
Bringing about this change, is the company's merger plans. HBL Limited, Sab Nife's promoter company is to be merged with it. Sab Nife was promoted by HBL in a joint venture with Sab Nife, AB, Sweden. HBL is an established company manufacturing various types of industrial batteries, including VRLA batteries, for the last 22 years. It is a closely held company with the promoter, Dr AJ Prasad holding the entire equity capital.
HBL is amongst the top three in almost all its products. Opines Shashin Shah, vice president, research, Networth Stock Broking, "HBL's business strategy is to focus on engineering intensive rather than commodity products. It focuses on industrial rather than brand driven consumer products. Specialised batteries has been its focus area so far. The merger will make Sab Nife bigger and stronger in the future". A look at how Sab Nife shapes up after the merger.
The technicalities
Since Sab Nife is the listed company, it has been decided to merger HBL into it. Apart from HBL, another company Pinaki Technologies is also likely to be merger into Sab Nife. Pinaki is an inactive company. However, since HBL and Pinaki have cross holdings in each other, the latter is also being merged to simplify the holding structure.
The board has approved the merger but the legal process is expected to be completed by April 2000. The swap ratio recommended by the board is 6.9 shares of Sab Nife for every share held in HBL and 2.5 shares of Sab Nife for every share held in Pinaki. This will dilute the company's equity capital from the current Rs 9.17 crore to Rs 20.72 crore.
Post merger, the promoters' stake will rise from 51 per cent to 76 per cent while the public holding will reduce from 33 per cent to 16 per cent. The foreign holding will also come down from 16 per cent to 8 per cent. The company's name is also proposed to be changed to HBL Nife Power Systems after the merger goes through.
A one-stop shop
The merger will make the new company a one-stop shop in the industrial batteries market. It will also lead to operational benefits, which will make the company highly competitive in the coming years. Both the companies are very strong in their respective product categories.
Sab Nife is the largest independent supplier of switch mode rectifiers in India. In pocket plate batteries, the company has a market share of over 80 per cent in India and is among ten manufacturers worldwide. It also holds a 5 per cent market share globally for these products and this is expected to go up to 10 per cent in the next three years. Apart from this, the company also makes batteries for diesel and electric railway locomotives and railway signalling and telecom electronics.
HBL is the bigger of the two companies with a varied product range. Apart from Exide and Amara Raja, it is the third manufacturer of VRLA. It is also one of two companies in India to make sintered Ni-Cad batteries. HBL also manufactures fibre electrode batteries under a sub-license from DAUG, Germany who developed the technology.
Apart from this, HBL is one of the three companies in India to make silver zinc batteries used in aircraft, missiles and torpedoes in submarines. The current product range of six batteries is being expanded. HBL's aircraft batteries are exported to Vietnam, Czech Republic, Jordan, Iran, Algeria and other west Asian countries.
During the current year, it will also become the second company in the world to commercialise the technology for high performance lead acid batteries. These batteries are used in aircraft, battle tanks and UPS systems. Thus with such a wide product range and synergies, the merged company will emerge stronger in the local and overseas markets.
Bridging the gap
After the merger, Sab Nife will to an extent bridge the gap between itself and other players in the industry in terms of turnover. In 1998-99, the company's sales stood at Rs 65.30 crore against Rs 186.55 crore for Amara Raja and Rs 816.86 crore for Exide. Similarly, while Sab Nife's net profit stood at Rs 9.58 crore, Amara Raja and Exide had net profits of Rs 43.90 crore and Rs 41.21 crore respectively.
HBL's sales in 1998-99, stood at Rs 100.68 crore while its net profit was Rs 21.18 crore. Adding this to Sab Nife's figures, the total sales stand at Rs 167.70 crore and net profit at Rs 31.18 crore.
Though the performance of both the companies will be formally consolidated only after the legal formalities are complete, this is a fair indication of what is in store for the future. The company has put out some figures on how it expects to perform in the future (see: The past and the future).
The projected net profit for 1999-2000 at Rs 25 crore is lower than the combined Rs 31.18 crore achieved last year. This is because the company, by its own admission, says that last year was an unusually profitable one. Margins were propped up by tax exemptions and low raw material prices.
The intense competition is expected to make the current year a tough one. Price reductions and rising raw material prices are expected to take its toll on the company's performance. However, the company is banking on rising exports and commercialisation of new high margin products, now under final stages of development, to help it in the future. HBL is also very strong in research and development (R&D), which augurs well for the future.
In the first quarter of the current year, Sab Nife has achieved a 60 per cent growth in net profit to Rs 0.66 crore while sales have also grown 81 per cent to Rs 10.87 crore. This is not an indication of the whole year's performance as typically the performance improves in every subsequent quarter. The merger will lead to operational benefits also and make the company highly competitive in the future.
Expanding horizons
The HBL group is also looking at the overseas market. It has entered into a 50:50 joint venture with the $100 million Rocket Electric Corporation, South Korea to set up a facility for nickel cadmium pocket plate batteries in Korea. Christened Pocket HBL, the new company will be promoted with an investment of $700,000, of which Sab Nife will invest $200,000 and HBL $150,000. The Korean partner will bring in the rest. The joint venture company will also promote exports of HBL products in Korea.
Apart from this, a 30 per cent joint venture (JV) is also planned in Saudi Arabia for nickel cadmium and VRLA batteries and another 40 per cent JV in the US for nicad aircraft batteries. Plans are also afoot for JVs in Malaysia, Vietnam and Egypt.
Valuations
The projected net profit of Rs 25 crore in the current year on the post merger equity capital of Rs 20.72 crore yields an earnings per share of Rs 12.06. The trading multiple of other players in the industry has been higher than that enjoyed by Sab Knife. The situation has changed recently as Amara Raja trades at a P/E of 5 due to a bad first quarter. Exide's P/E is 25 while Sab Nife is currently available at a P/E of 6.31 . But given the future potential of the merged entity there is bound to be a re-rating of the scrip to bring it more in line with industry norm. At the current price of Rs 66, the scrip is a good long term buy. |
