Sandvik Asia: Hold/Avoid Fresh Exposures

Recommendation: Hold/Avoid Fresh Exposures

Sowmya Krishnan

INVESTORS in Sandvik Asia can hold on to the stock, though any fresh exposures can be avoided now.

The company is going through a restructuring phase, with the parent seeking to hike stake in the company and eventually delist it from the stock exchanges.

Sandvik AB, the parent company, recently made an open offer to hike its stake from 73.22 per cent to 100 per cent at a price of Rs 850 per share. Post-open offer, it holds 88.93 per cent stake in Sandvik Asia. With the non-promoter holding just above 11 per cent, the liquidity in the stock is limited. This is evident in the low trading volumes.

The promoters are likely to come out with a second open offer to mop up the remaining shares and the possibility of delisting of the shares from the stock exchanges is also not ruled out. Under these circumstances, the share prices might remain range bound at around Rs 750 and an upside is possible if the promoters come out with a second open offer. Therefore, investors can stay invested and exit the stock in case an open offer is made.

Sandvik Asia, the Indian arm of Sandvik AB, Sweden, is one of the major players in the cutting tools segment and has a cutting edge in manufacturing tungsten carbide tools. In 1998, the promoters hiked their stake to 73.22 per cent from 54 per cent through an open offer.

Sandvik Asia is benefited by the increased promoter interest in two ways. One, the company has access to the group's technical know how and managerial expertise. This enabled the company maintain its market position in a competitive market. Two, it was made the global supplier base for the group for certain specific products. This enhanced access to export market.

A diversified revenue base helped it overcome the sluggishness in the domestic market and maintain a decent topline growth. Increased exports also helped the company mitigate exchange rate risks arising out of the high import content of raw materials. Thus, all these benefits, coupled with rigorous cost cutting measures helped the company to not only post a decent topline and bottomline growth in 2000, but also provided a competitive edge in the market.

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For the year ended December 2000, sales jumped 23 per cent to Rs 193.7 crore. This was possible due to a robust 117 per cent growth in exports to Rs 33.25 crore, constituting around 17 per cent of the total turnover. However, for this year, it is difficult to achieve such growth rates considering the slowdown in the automobile and other user industries. For the half year ended June 2001, its income from operations was Rs 99 crore and it reported a net profit of 7.58 crore. A group company, Titex India, was merged with Sandvik Asia during the year and, hence, the figures are not comparable.

The company appears to be gearing well to face the challenges posed by competition and the industrial slowdown. Hence, investors can hold on.