Carrier Aircon: Accept

Recommendation: Accept

B. Krishnakumar

CARRIER Mauritius, a company registered in Mauritius, along with Carrier Corporation and Carrier Singapore, are making a voluntary offer to the public shareholders of Carrier Aircon to acquire up to 114.78 lakh equity shares (representing 49 per cent stake) at Rs 100 per share.

Carrier Aircon is a 51 per cent subsidiary of the American air-conditioner major -- Carrier Corporation -- which in turn forms part of United Technologies, US. Carrier Aircon is a major producer of room, window and central air-conditioners.

Aided by rationalisation of excise duty structure, the company's performance improved significantly during the mid-1990s. The reduction in excise duty resulted in the narrowing of price differential between air-conditioners produced by the organised and unorganised sectors.

Backed by inhouse compressor manufacturing facility and planned capacity expansion projects, Carrier Aircon managed to stage a turnaround in operations during the 1990s. Until a few years back, Carrier, Voltas, Amtrex Hitachi and Blue Star were the prominent producers of air-conditioners in the country.

However, the rationalisation of indirect tax structure and the liberalisation of export-import policies have exposed the Carrier Aircon and other companies to the higher degree of competition both from new entrants and cheaper imports. The AC industry now has a host of local and international players including Videocon, Samsung and LG, among others.

The rising competitive pressure has dented the performance of Carrier Aircon. For the year-ended March 2001, the turnover rose 21 per cent to Rs 379.89 crore, while the post-tax earnings declined by 31.55 per cent to Rs.6.27 crores. The magnitude of improvement in turnover could be partly vitiated due to the labour problem that affected the performance of the company during 1999-2000. The restoration of normalcy has propelled volume growth in 2000-2001.

As far as the future prospects are concerned, the company has the requisite technical-cum-financial strength to withstand competitive onslaught. In the process, the margins would, however, be affected.

This is already reflected in the company's performance over the recent years. Backed by the global major, Carrier Aircon would be in a position to launch new models at competitive prices. On the other hand, the ad-spends and other promotional outgo would also increase simultaneously.

Recently, the company has also turned aggressive in opening new retail outlets. All these efforts would act as a drain on the cash reserve of the company. From a stock market perspective, the company's share price was languishing at around the Rs 60-70 range prior to the open offer.

The entry of multinational brands, including the recent entry of Fujitsu General (owner of O General brand), would only add to the existing competitive pressure in the industry. Though Carrier could be expected to maintain volume growth, profitability would be strained. And, a blip in volume growth would cause a serious dent on the financial performance.

Taking into account these factors, it would better for investors to accept the open offer, which is priced at Rs 100 per share. Also, the company is unlikely to command the kind of price-earnings multiple that it used to during mid-1990s. In this context, the open offer price of Rs 100 appears attractive. Risk-averse investors, especially, could tender their holdings to the open offer. The offer closes on July 31, 2001, and the lead manager is DSP Merrill Lynch.

Salient features

*Carrier Mauritius, along with Carrier Corporation and Carrier Singapore, are making an open offer to the public shareholders of Carrier Aircon to acquire 49 per cent stake in Carrier Aircon. The open offer is priced at Rs 100 per share.

*Consequent to the open offer, the shares of the company are proposed to be delisted from the stock exchanges.

*Shares of the company are now traded at both the Bombay and National Stock Exchanges.

*The offer closes on July 31, 2001.