Don't sell Sulzer

Sulzer India Limited, is a subsidiary of Sulzer Limited, Switzerland, is a part of Sulzer Chemtech Business Unit of Sulzer. The Promoter of Sulzer indicated in its intimation to the Board of Directors of the Company on March 04, 2010 that it may acquire the equity shares offered to it in the Delisting Offer at a price of Rs. 870 per equity share. The market price immediately jumped on the announcement. The stock went as high as 1,550 and currently quotes at Rs 1235. The delisting will be done at a price discovered by reverse book building process. The bidding opens on July 13, 2010 and closes on July 16th.

Now the question in the minds of Sulzer shareholders. Should they sell out? Let's analyze.Here are the results of past 5 years for Sulzer.

Few noteworthy points

  1. The company is a zero debt company
  2. The business is not capital intensive. If you remove 34.58 crs. cash and bank balances, the business has grown over the years without significant investments.
  3. The business is asset light. The company generates 162.25 crs. revenue with 15.56 crs. net fixed assets.
  4. The returns from capital are high. The RONW is 33%, 5 year average is 38%.
  5. The company has grown its networth at a rate of 17.5% compounded in last 5 years.
  6. The company has paid a large chunk of earnings as dividends. If you take 5 year average, they have distributed 44% of earnings as dividends.
  7. The company's business is lumpy and can not be compared on Q on Q or year on year basis.
  8. The company has low working capital requirements.
  9. In the current year, the company has increased its investments and fixed assets. (a) In june 2009, the Company has acquired 91% of the equity shares of Sulzer Chemtech SAB Technical Services (India) Private Limited for 12.98 crs. The share of profits of this subsidiary are not fully reflected in the consolidated results. (b) The company has increased considering Capital Expenditure in the current year which is reflected in 14.94 crs. Under the head of Capital Work-in-progress. This is a large investment considering their current net block of 15.56 crs. This investment will pay dividends in future.
  10. The company earns 85.5 per share. The average EPS of past 5 years is 56 rs.

All of these points indicate a really solid business which is about to embark on a higher growth path. All of this you can derive solely by looking at numbers but what does it do to get such superb returns?

"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 viz. 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 in the Far East Asia, Middle East and Europe through Sulzer Chemtech channels"

Without going into details, let me give few characteristics of such business. It's a niche and high tech market with low competition. The mass transfer technology drives key chemical processes of a plants. The products of Sulzer control processes like mixing, separation of gas/liquids, distillation, absorption and crystallization. These products are essential to working of a chemical plant. Reliability is a key and that's where Sulzer, with 40 years of market leadership behind it, gains the edge. Such businesses are profitable but profits tends to be lumpy because the revenues are linked to capacity expansion and modernization of the customer industries.
The consumer industries for Sulzer's product are by no means stagnant. There have been capacity expansions going on in fields of Gas Processing, Fertilizers, Petrochemicals and refineries. Even if growth may not be huge, you can assume that the revenues will keep pace with industrial growth rate.

Now if I own an excellent business giving me 36.2% returns on capital and I know that the recant capacity expansions and acquisitions are not being reflected yet in the EPS, and I'm hopeful of growth in future, why would I not want to have the entire cake?

The promoters of Sulzer are right in their logic but so am I. Why should I sell? The floor price of Rs 870 is just 10 times the profits. Even at Rs 1740, I'm getting only 20 times the current profits which I know doesn't reflect the profit potential of investments already committed.
A company that makes 36% return on networth and pays out 45% of profits it makes, will grow its profits at about 20% per annum provided it can deploy the retained profits as profitably as current investment. The returns on invested money are higher than 36% we have calculated because all the networth of the company has not been invested in the business. A huge 42% of it is lying in banks as cash and other liquid instruments. Based on this, I would be surprised in Sulzer fails to grow its profits at less than 20% per annum in next 5 years.

If it does grow at 20% per annum compounded, the EPS, in dec 2014 will be more than rs 200. If the dividend payout rates are kept at 35%, it will be paying me Rs 70 every year as divided. There is no question for selling a business as attractive as Sulzer at a price less than Rs 2000 per share.

Now imagine this. In year ending Dec 2006, the profitability of the company went down sharply. The profits fell from rs 21.77 crs to Rs 2.99 crs. While the sales went up from 56 crs. to 81 crs. The promoters saw an opportunity to take advantage of depressed business and depressed prices and gave an offer of Rs 480 when the floor price as per SEBI guidelines was Rs 246. Had the investors sold out the company, you would not have been reading this story now, Sulzer trades at Rs 1235 today. The profits are back at 29.5 crs.

It is very likely that the company's business last year saw a temporary dip and the promoters see an upturn ahead. Don't be misled by the Q1 numbers because it is always possible to postpone recognizing the revenues of Q1 to Q2 and so forth.

Sulzer has been on my watch list for many years before I finally bought it between 800 and 900 early this year before the announcement of delisting. I'm upset with the delisting plan, I voted against it and I do not plan to sell out. I can only hope that other investors also understand the scenario. Remember, you have nothing to lose because even if you don't sell out today, you will have an opportunity for 365 days to sell gold at the price of silver.


1. Sulzer Delisting Offer

2. Company Website


Kamlesh Pandey said...

SULZER INDIA LTD Reverse Book Building - Live

Bidding opens 13th July and closes 16th July 3:00PM

Anonymous said...

Dear Kamlesh,
Its nice to see you back.however i missed you these days.Excellent article on sulzer.BTW in that case what do you say on Honeywell Automation.
--Aatma Madhav

Anonymous said...

Would you be kind enough to let me know as to how in the year 2006 the company managed to increase its sales but still ended up posting tremendously less profit? i mean the only item that did the most damage was expenses which stand at 71 crs.

Can you shed some light on it pls.

BTW welcome back from your slumber!

Await your comments

Kamlesh Pandey said...

Apart from rise in expenditure, the other critical factor was the fall in other income which went down from 29.51 crs to 6.3 crs. So the profits of year 2005 may have been inflated due to other income. You can look for the reasons behind rise in cost and fall in other income in annual report for 2006(that is, if you can find it. I don't have the report)

Anonymous said...

Hi Kamalesh,
Now that govt has allowed MNC subsidiaries in India to send UNLIMITED royalty to parent companies, I am sure everyone will start using it to push the indian ops to break-even point or to loss and then stop giving dividends. Note that they do not need shareholders or their money. Maruti has done it and HUL has increased royalty to Unilever. So, I think the best thing for us is to avoid these MNC companies. I love Colgate, Castrol, HUL, BASF etc. But because of this Royalty monster sitting in my head, i have sold almost all of them and will sell remaining stocks also in few weeks. can you analyse this.

Kamlesh Pandey said...

The issues is complicated and so far, I haven't reached the same conclusion as you did i.e. there will be a significant increase in royalty payments.

The main problem is that an MNC which charges disproportionate royalty will be able to charge it as expense and the Tax dept would like to see rationalization of such a high charge.
MNCs to document, rationalise royalty payments

I read somewhere that the royalty payments are also subject to higher taxes in foreign countries and hence it may not be the best way to take profits abroad.

But this definitely requires more analysis. Will keep you posted if I reach a conclusion.

Anonymous said...

Hi Kamlesh

I am holding few shares of Sulzer India. What will happen if I continue to hold them beyond September 2011? Will Sulzer get listed in BSE, so that I can sell them?
Please giude me.Thank You

Kamlesh Pandey said...

If you don't sell before September 2011, you still remain a shareholder of a private company. You will not have a ready market to sell your stock. You will be forced to hold until promoters decide to buy you out. The promoters have no obligation to buy your shares after September 2011 but you still have all the shareholder rights like dividends, option to subscribe to newly issued shares on proportionate basis. Blog Search Engine blog catalog EatonWeb Blog Directory Bloggapedia, Blog Directory - Find It! Blog Directory Directory of Investing Blogs Blog Listings Superblog Directory