From THE HINDU group of publications
Sunday, July 08, 2001


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Yokogawa Bluestar: Buy

Recommendation: Buy

Suresh Krishnamurthy

Compared to Blue Star, the valuation of Yokogawa Bluestar is less attractive.

The company's market capitalisation is around Rs 25 crore, and the stock trades at a price to earnings multiple of around eight times its earnings for the year ended March 2001.

Similar to Blue Star, the financial performance of Yokogawa Bluestar may suffer in the near term if industrial investment remains sluggish. For Yokogawa Bluestar, there are two other negative factors. One, the industrial automation industry is even more sensitive to the rate of growth in industrial investments. In this backdrop, the sluggish investment climate could affect earnings growth even more for Yokogawa Bluestar.

In fact, the dependence on the investment climate has reflected in a high degree of volatility in the earnings of Yokogawa Bluestar in the past few years. Earnings are up 100 per cent one year, and down 50 per cent the following year. Another factor is the state of competition. The industry is highly competitive, with the intensity increasing in recent years. The threat of further downward pressure on margins persists. Overall, the operational risk factor for Yokogawa is high.

In terms of financial risk, Yokogawa Bluestar is not highly leveraged, which is a positive factor and offsets the high operational risk. Yet, the volatility in earnings is reflected in the dividend declarations as well. The company declared a dividend of Rs 1.50 per share for the year ended March 2001, representing a 50 per cent decline over the previous year.

Overall, the volatility in dividends and earnings make an investment in the company fall in the high-risk category. Balancing this issue is the valuation of the stock, which appears attractive in light of the average earnings of the company in the recent past, and the potential for reasonable growth in earnings in line with the growth in industrial investment.

The major shareholders in Yokogawa Bluestar are Yokogawa of Japan and Blue Star. Yokogawa holds a 40 per cent stake in the company while Blue Star holds a 29 per cent stake in the company. Blue Star has repeatedly reiterated that it is willing to sell its stake to Yokogawa at the right price.

While any such consolidation of holdings will not result in an open offer, it indicates the possibility of greater involvement of Yokogawa in the Indian venture. However, the possibility of such equity consolidation appears remote and should not, therefore, form the basis of an investment decision.

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