Esab India: Buy on declines

Recommendation: Buy on declines

B. Krishnakumar

THE emergence of technology stocks as the market favourite in recent years has affected the sentiment towards quite a few fundamentally-sound companies.

Moreover, the sluggish trend in performance on account of overall slowdown in the industrial and engineering industries has affected the performance and valuation of quite a few companies. Esab India is one such company whose stock price declined steadily.

Given the recent turnaround in operations and the developments at the global level, the Esab India stock appears to have the potential to rule firm. Long-term investors could contemplate exposure in the company.

In technical collaboration with Esab Holdings, UK, Esab India produces a wide and comprehensive range of welding, cutting and allied products. The technical collaborator holds about 37 per cent stake in the company. Esab India is the second largest player in the welding equipment and consumables industry. It derives a major chunk of its revenues from the sale of welding electrodes. Close to 10 per cent of the revenues is derived from the sale of continuous wire electrodes and about 30 per cent from welding equipment. The company's prospects are linked to the automobile, steel and the engineering sectors.

The company operates in an industry that is characterised by high volume and low margins. Though Esab concentrates at the higher end of the welding industry, the key to volumes lies in the lower end. In India, the lower end -- metal arc welding -- is commonly used on account of cheaper cost. This segment is dominated by unorganised sector players. Hence, Esab India has had to contend with mounting competition from the unorganised sector.

On the financial front, the slowdown in the automobile, steel and general engineering sectors has had a negative impact on the company's performance. For the year-ended March 2000, the turnover declined by 21 per cent to Rs. 127.81 crores. The company reported a net loss of Rs. 19.93 crores compared to a net profit of Rs. 8.71 crores the previous year.

Apart from the slowdown in key user sectors, the company's decision to restructure its operations and the implementation of the VRS scheme also played a part in pulling down the financial performance. For 1999-2000, Esab India absorbed Rs. 12.13 crores on VRS expenses. The company has taken up modernisation projects. It has also taken steps to reduce its debt burden which has resulted in a steady decline in the interest outgo.

The positive impact of the restructuring initiatives and the retirement of debt is visible in the performance for the quarter-ended June 2000. For this period, the turnover improved about 72 per cent to Rs. 40.72 crores, while the company posted a net profit of Rs. 3.13 crores compared to a net loss of Rs. 1.25 crores in the corresponding previous period.

As far as the future prospects for Esab are concerned, the growing awareness towards product quality coupled with the entry of a host of multinationals in the area of consumer durables and automobiles would foster demand for higher end welding consumables and equipment. This, in turn, should bode well for Esab India which is a prominent player in the segment.

In a recent development, the US-based Lincoln Electric decided to takeover Esab Holdings, UK, which, in turn, controls a 37 per cent stake in Esab India. The possibility of an open offer linked to this development cannot be ruled out. However, irrespective of whether the open offer materialises or not, the takeover at the global level would have a positive impact on Esab India as Lincoln Electricals is a top global player.

Considering the recent turnaround in performance and the sustained rise in steel and automobile production, the prospects for Esab India appears encouraging. Long-term investors could contemplate exposures.