Mark to market | RCom registers robust recovery

Mark to market | RCom registers robust recovery
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First Published: Tue, Jun 12 2007. 12 55 AM IST

Updated: Tue, Jun 12 2007. 12 55 AM IST
The wireless phone industry has largely recovered from the impact of the subscriber verification process. Those using the GSM industry standard recorded 5.04 million subscriber additions in May, 22% more than in April. Reliance Communications Ltd, the market leader among those using CDMA standard, reported a 40% increase in net additions to 1.4 million.
The industry looks set to report net additions of at least 6.6 million subscribers, taking it back to levels achieved in January, prior to the impact of the pre-paid subscriber verification process. Between February and April, net additions averaged only about 4.5 million. Bharti Airtel Ltd continued to enjoy a majority share, with net additions of 1.85 million. Hutchison Essar Ltd added 1.5 million subscribers, followed by Reliance with 1.4 million.
Reliance Communications, among the worst hit in the verification process, seems to be jumping back smartly. In the March quarter, the company deactivated 5.58 million subscribers due to reactivation requirements, reducing its subscriber base by about 17%.
In the past two months, it has added 2.4 million subscribers, much to the delight of the markets.
Based on the good response to its recent launch of low-cost handsets, analysts expect the growth to continue. Its shares have outperformed Bharti’s since end-April. But there are other reasons for Reliance’s recent outperformance.
News reports suggest that the company is set to offload some stake in its tower business, which is valued between $4 billion and $5 billion. The markets are also factoring in upsides because of a likely equity issue by FLAG Telecom Ltd.
Besides, its shares had underperformed by a huge margin earlier in the year because of the drop in its subscriber base. Analysts say that the stock is now playing catch-up.
There was little reason for surprise in Amtek Auto Ltd’s acquisition of UK-based die castings supplier JL French (Witham). The buyout had been in the air for some time. The company has a sizable chunk of cash sitting on its books and the management had indicated that two acquisitions were in the pipeline. More importantly, Amtek Auto is a company known for growing through acquisitions and, prior to the JL French deal, it had made seven overseas buyouts in three years. Small wonder the stock barely moved on the announcement.
At 0.6 times sales, the deal is cheap for Amtek, not least because it doubles the capacity of the company’s existing aluminium foundry in Pune. The plan is to shift all the assets acquired to Pune. That is standard procedure for Amtek Auto, which has worked on a business plan of acquiring units abroad and shifting the manufacturing to India while building on the relationships of the acquired company. That’s precisely the strategy they used to revive Smith Jones, their first acquisition in the US.
Although Amtek Auto has manufacturing facilities in a number of locations in the US and Europe, its strategy is to manufacture from low-cost locations. For instance, analysts say that the company plans to increase outsourcing substantially from Zelter and GWK, two of its overseas acquisitions.
With revenues from the stand-alone company at less than a quarter of consolidated sales, the natural question is whether such a rapid inorganic growth strategy will strain the company’s finances. That hasn’t happen- ed—CARE recently reaffirmed the AA+ rating assigned to the company’s non-convertible debenture programme.
Net profit growth in the March quarter for consolidated operations was 55%, compared with the year-ago period, on the back of sales growth of 47%.
At around Rs420, the stock quotes at 14 times analysts FY08 (the company has a June year-ending) estimate, but that doesn’t take into account the Rs97 per share worth of cash on its balance sheet. The valuation doesn’t do justice to Amtek Auto’s successful application of its inorganic growth strategy.
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First Published: Tue, Jun 12 2007. 12 55 AM IST
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