Sulzer India , An MNC going cheap?

Key Investment Highlights

• Sulzer India is a subsidiary of Sulzer Limited, Switzerland, is a part of Sulzer Chemtech Business Unit of Sulzer Corporation
• Sulzer Ltd holds 80% stake in this company.
• Very low equity of 3.45Cr
• Highly conservative and quality management.
• Good dividend paying track record (350%)
• March FY10 EPS will be in the range of 110Rs.
• At 800Rs this MNC stock is trading at a PE of less than 8 and a Market cap of 280cr.
• Debt free company with a cash of around 55Cr in its books as on March 2008.
• One of the major players in the Indian market who can provide technological solutions for Mass transfer technology requirements for a wide variety of industries like Refineries, Petrochemicals, Chemicals, Gas Processing, Fertilisers etc.
• The company also addresses the export market mainly the growing demands in the Asia Pacific region through Sulzer Chemtech channels in the regions.
• The company should do well with the progress of Indian economy and in general with the progress of Asia pacific region.

Introduction

The key investment highlights listed above are too good to believe which makes one think why this company is still trading at these ridiculous valuations. So let me start this post with a caution note and all the grey areas when you invest in this company.

Note of Caution / Risks

The first note of caution is the 80% stake held by the parent company Sulzer Ltd and more importantly none of this is in DMAT form. This makes this company a high probability delisting candidate. In fact they have tried to delist the company way back in 2006 but failed. Also the parent cannot continue to hold 80% as per the new SEBI guidelines and will have to bring down the stake to 75%. So if the company reduces its stake to 75% it will be a big positive as it will show its commitment towards the Indian market and its shareholders. In which case I would recommend it as a major portfolio stock.

The second issue is the low equity and low floating shares in the market which can result in unfavorable price movements. So one can consider buying this stock in small lots and should in no case become a major portfolio stock. This also brings another issue of liquidity as the daily traded volumes normally are in the range of 300-400 shares now.

What this company does?

The company is engaged in providing technological solutions with wide range of products and services for Mass Transfer Technology requirements to a wide variety of industries like Refineries, Petrochemicals, Chemicals, Gas Processing, Fertilizers etc. Big government establishments like Oil Sector PSU and other Private Corporates are the main customers in the domestic market.
The company also addresses the export market mainly the growing demands in the Asia Pacific region through Sulzer Chemtech channels in the regions.

Business opportunity

The Indian economy is still in a growth path with many new projects continue to come up in refineries and the petro chemicals sector. The growth in this sector will have a positive impact on the business prospects of this company.

Apart from this many of its parent’s work in the Asia pacific region will get channeled through this company because of obvious cost reasons. We have seen the same phenomenon with many of the MNC’s Indian subsidiaries like ABB, Siemens etc.

Valuation

At 800Rs the company has a market cap of 280Cr Rs. The company already has around 55Cr cash in its book as of 2008 March which is expected to be above 60Cr this year. This is a debt free company with very good operating cash flows.

The half year sales are around 115Cr compared to 151Cr last year. The net profit for the 6 months ending Sep 2009 is 26Cr compared to 20cr last year. The EPS for 6 months is around 75Rs and the full year EPS is expected to be in 110Rs range which gives a PE of less than 8.

For an MNC with very good dividend yield these kinds of valuations are very cheap. In fact with the investments that are happening in the Oil refineries and chemical business in India I would not be surprised to see an EPS of close to 200 in next 2 year.