Widia India: Hold

Recommendation: Hold

Sowmya Krishnan

CONSIDERING the strong parentage and sound fundamentals of the cutting tools major, Widia India, long-term investors can stay invested in the stock.

However, taking into account the current sluggish business environment, fresh investment in the Widia stock can be avoided (except by those with a preference for fairly high risk) until there are signs of revival in the broad economic indicators.

Investors with a penchant for risk and the patience to wait through the present slowdown can take exposures, to take full advantage of any re-rating of the stock once the economy improves.

Widia India is a major player in the cutting tools segment. It manufactures tungsten carbide tools and special purpose machines for metal cutting, mining and metal forming applications.

The company's performance depends to a large extent on the automobile and engineering industry. The current sluggishness in the automobile sector and the tough competition in the cutting tool industry could affect the topline growth.

However, the slump in the domestic demand is mitigated to some extent by the growth in exports. For the year ended December 2000, the company has achieved a 20 per cent growth in exports. The strong ties with its German and American parents has not only helped it explore new markets but also introduce a range of new products. Efforts towards indigenisation of technology has resulted in the manufacture of new range of products.

Its broad product range, quality service, thrust on providing customised tooling solutions, broad customer base that includes the major players in the automobile sector and enhanced exports has helped the company maintain its leadership position in the market.

The rigorous cost-cutting measures taken by the company for the past few years has played an important role in maintaining its bottomline growth despite adverse economic conditions. However, the high import content of raw materials has squeezed its margins and is a cause of worry. Fluctuations in raw material prices and the weakening rupee might further reduce profitability.

Despite the poor economic prospects that affected the industry, Widia managed a healthy showing. For the half year ended June 2001, the company recorded a 14 per cent growth in sales at Rs 81.83 crore, compared to the corresponding previous year. Net profit, however, declined 11.7 per cent to Rs 5.05, primarily due to an increase in operating expenses.

On an equity base of Rs 21.97 crore, the per share earnings work out to Rs 11.08. At the current market price of Rs 43 per share, the stock trades at a price earnings multiple of four times its earnings as in December 2000. The stock has sufficient room for appreciation from these levels.

Given the strong fundamentals, the prospects for Widia India are likely improve with a revival in the automobile sector. Hence, investors with a long-term perspective can hold on to the stock.