Esab India: Hold/Buy on declines

Recommendation: Hold/Buy on declines

B. Krishnakumar

The company, a major producer of welding electrodes, consumables and equipment, has a technical collaboration with Esab Holdings, UK, which holds about 37 per cent stake in it.

Esab India is the second largest player in the welding equipment and consumables industry. It derives a chunk of its revenues by selling electrodes, followed by welding equipment and continuous wire electrodes.

The company has a major exposure to the automobile, steel and the engineering sectors. Given that Esab India operates in an industry wherein volume growth is the key driver of earnings, it is not all that surprising to notice a dip in performance in 1997-98 and 1998-99, when the automobile and the engineering sectors went through a bad patch.

In the meantime, Esab embarked on a restructuring-cum-cost-cutting exercise, which helped the company improve operational efficiency. This and the conscious control over working capital requirement helped it post a sharp turnaround in operation this fiscal.

For the year-ended March 2000, the turnover fell 21 per cent to Rs 127.81 crore, while the company reported a net loss of Rs 19.93 crore compared to the net profit of Rs 8.71 crore in the previous year.

Apart from the slowdown in user sectors, the implementation of the VRS was mainly responsible for pulling down the financial performance. For 1999-2000, Esab India absorbed Rs 12.13 crore towards VRS expenses. However, the positive impact of the restructuring programme and the modernisation projects is reflected in the performance for the half year ended September 2000.

For the six months ended September 2000, the turnover improved 42 per cent to Rs 79.40 crore, and the company posted a net profit of Rs 6.94 crore compared to a loss of Rs 1.92 crore. As for the future prospects, the growing awareness of product quality and the entry of a host of multinationals in consumer durables and automobiles, would foster the demand for higher-end welding consumables and equipment. This bodes well for Esab India.

Though there may be short-term blips in performance, the company has adequate techncial-cum-financial muscle to tide over business cycles. The recent restructuring exercise, coupled with tight cost-control measures, would help the company grow at a fair clip from a long-term perspective. Long-term investors could use price weakness to take exposure in the company.