There is a house on Malabar Hills, a three-bedroom hall kitchen affair with a massive 20th floor sea view. However, it costs Rs 1,00,000 per square foot. So, if one’s earnings are Rs 2,50,000 per month, does it make sense to buy it, especially if the real estate rates are expected to plummet to Rs 50,000 per square foot in a month or so?
This is the question the street is asking of India’s emerging global giants. In the last month, India’s biggest companies have made acquisitions to the tune of $18 billion. While this should make everyone happy, investors have hammered the stocks of these MNCs.
“Shareholders will have to bear the bad balance sheets of these companies in the coming two to three years. This complicates the view that the price paid for acquisition is higher than the company’s worth,” said an investor with holdings in the two companies.
Since announcing Corus deal, the Tata Steel stock has lost more than 17 per cent in the last two weeks. Hindalco, the scrip on BSE, has lost almost a fourth in its market capitalisation since February 2. Hindalco has fallen 23 per cent since achieving its two-week peak of Rs 185.65. The scrip closed today at Rs 142.1.
Valuation, is the single largest cause of concern, say market-watchers. Even if Tatas manage to secure debts at a low interest rte of 5 per cent, shirtsleeve calculations indicate that they might have to pay around Rs 2,600 crore as interest in the coming years, compared to the total profit of the combined entity at Rs 5,500 crore.
The same is happening with the Bharat Forge scrip. Despite rumours of the company being in the race for ThyssenKrupp’s US forging units, the stock has been sharply range-bound in the last two to three quarters. “It is going through what would happen to both Tata and Hindalco scrips,” said a highly placed official in a Mumbai-based stockbroking firm. ThyssenKrupp is one of the world's largest steel firms.
Both Tata and Hindalco acquisitions are in the commodity space, which makes them vulnerable to the swings in the steel and aluminium cycles, he said adding, “Given that the steel cycle is close to topping out, the market feels that valuations are too high.”
The stock behaviour on these two scrips is nothing new in the global space. “Companies including Disney and General Motors have been hammered after making acquisitions that had negative effect on the balance sheet,” said Rajiv Sampat, director, Parag Parikh Securities.
However, the market response does not have a bearing on the fact that the investors do feel good about Indian companies going global. “It is always good to have Indian companies going abroad, though the valuations at which they buy assets are reasonable,” he added.