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Sowmya Krishnan

AFTER two years of its acquisition of a group company, Chicago Pneumatic, Atlas Copco appears to be reaping the benefits now. The earnings numbers for the April-June 2002 quarter showed substantial improvement in operating margins. The turnover too improved in the June quarter compared to the corresponding previous period and also on a quarter-on-quarter basis. This might indicate a slight pick up in demand, which is also being witnessed in other segments of the capital goods sector. An almost three-fold jump in profits at the net level is primarily due to a generous helping from one-time cash flows. However, the profits before extraordinary items and restructuring costs (sustainable profits) too showed good improvement.

Overall, Atlas Copco appears to be on the right track aided by improved operational efficiency, an outcome of the restructuring efforts taken by the company in the last two years.

After two quarters of de-growth, the topline rose 7.5 per cent in the quarter ended June 2002 to Rs 59.6 crore while dipping 2.3 per cent to Rs 115.25 crore for the six months ended June 2002, suggesting that the contribution from the June quarter sales has, to some extent, balanced the fall in the previous quarter. What is more important is the improvement in operational efficiency. Despite a rise in the raw material costs as a proportion to sales, the savings in employee costs and other operating expenses made a significant impact on the operating margins. Employee cost and other expenses as a percentage of sales fell from 38.5 per cent to 27.9 per cent. This resulted in a 6.5 percentage point jump in operating margins from 8.9 per cent in the corresponding previous quarter to 15.4 per cent in the June 2002 quarter. Post-merger with Chicago Pneumatic, Atlas Copco downsized its staff and consolidated its manufacturing capacities. The merger also resulted in savings in administrative costs.

The company sold its Mulund plant and its Halol plant and consolidated its manufacturing operations in Pune and Nashik as a part of its restructuring efforts, resulting in a fall in depreciation charges. Consequently, sustainable profits jumped 56 per cent to Rs 9.9 crore.

Even after meeting out restructuring expenses, one-time cash inflows of Rs 12.8 crore (from the sale of its Mulund and Halol plant) spruced up the bottomline further.

Outlook: The topline might take some more time to look up as a strong signal of recovery is yet to show up. However, especially demand for rock drilling equipment is picking up. The bottomline would continue to hold the recent gains with some improvement in light of the various steps taken to trim the organisation. Further, a one-time cash flow from the sale of its stake in Revathi CP is yet to accrue. With substantial cash and absence of any capital expenditure, the company might also decide to return free cash to investors in some form though this is only a prospect now.

Recommendation: At the current market price of Rs 181.45, the stock trades at a price-earning multiple of around 10 times its June 2002 annualised sustainable earning per share. Given the better future prospects, the stock might still hold scope for further gains. Shareholders can stay invested.

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