The country’s second largest power transmission equipment maker, KEC International Ltd, will buy US-based SAE Towers Holdings Llc. The $95 million (Rs443.65) buyout adds value to the RPG group firm on several counts.
SAE, an entity spun out of the electricity tower manufacturing segment of ABB AG, is a global leader in steel lattice towers used for power transmission. In an analysts’ conference call, KEC management indicated that SAE has a market share of over 40% in the US, Mexico and Brazil. So far, KEC has had a global presence in over 40 countries, mainly in South Asia, Africa, Australia and South America. The acquisition not only catapults it into new locations, but also makes it the world’s largest producer of steel lattice towers.
As a 100% subsidiary of KEC post-acquisition, SAE will enhance both revenues and earnings immediately as the management hopes to complete the deal in a month. SAE reportedly registered revenues of $115 million, $120 million and $137 million, respectively, in the last three calendar years. The US market holds great promise for growth, given its ageing infrastructure, while Brazil and Mexico are emerging economies where infrastructure ramp-up is a priority. Analysts have accordingly revised KEC’s revenue and net profit estimates for fiscal 2011 by 10-15%.
Graphic: Paras Jain/Mint
Interestingly, SAE’s relatively higher operating profit margin of 14%—compared with global peers—could even boost KEC’s profitability. KEC’s OPM has averaged about 10.5% in the last several quarters. SAE’s higher OPM could be attributed to relatively lower competition in US markets. Majors firms like Areva T&D, Siemens AG and even ABB, who were leaders for several decades in transmission equipment, are moving into higher-end businesses. Besides, while SAE has its marketing outfit in the US, the factories are in low-cost regions like Brazil, giving it an edge in costs.
Also KEC, which has been present mainly in towers, will now have access to global factories which make the entire range of power transmission equipment from 69KV to 765KV. This would bring down shipment costs and losses due to damages which could be incurred in exports from India.
According to analysts, KEC has struck the deal at a good valuation—about five times the enterprise value to operating profit—when its peers are trading at around eight times the same. But lower valuation could be due to the fact that SAE’s plants are operating at only 60% capacity despite the buoyant market.
The management is confident of funding the buy through a mix of internal accruals and debt. Concerns remain on integration of SAE with KEC; the acquired firm has over 700 employees, too. Besides, KEC as a turnkey firm uses its capacities for in-house needs, while in the US it will have to supply equipment to utility players. So the businesses are rather different.
Meanwhile, KEC has an order book of around Rs.5,600 crore. Analysts hope for a strong order inflow from domestic markets in the next five to six quarters as Power Grid Corp. of India Ltd has so far spent only half its estimated capex for the 11th Plan.
KEC’s execution in the June quarter was rather sluggish. Revenue grew by 16% year-on-year to Rs846 crore, though a part of this was due to the merger of RPG Cables. The firm’s profitability was hit by rising raw material costs. The acquisition could help rationalize costs and synergize design and engineering capabilities.
Its shares gained around 2% to close at Rs.495 on the Bombay Stock Exchange. While the stock trades at 11 times its 12-month forward earnings, the revenue and earnings accretion from the buy, coupled with its global leadership, could see a re-rating.
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