Sona BLW Comstar has acquired Escorts Kubota Railway Equipment Division (RED) for an enterprise value of Rs 1,600 crore. The acquisition will be made on a sale basis subject to the final terms of the agreement. It will give Sona BLW a strategic position in the fast-growing railway equipment space and diversified product offerings from which it will be able to tap into this growing demand for railway components, brokerage firm Philip Capital said.
As a well-established supplier to Indian Railways, the division’s capabilities focus on the production of safety-critical components such as brakes and suspension systems. The division reported revenue of Rs 950 crore with an EBIT margin of 18.8 per cent in FY24. According to Philip Capital, the acquisition is expected to be earnings accretive from the first year of operation, be top-line positive and more solid for the company in the railway equipment sector.
Sona BLW said that through the acquisition of RED, growth potential would come from product line expansion and inclusion of the company’s advanced technology, portfolio diversification and entry into the railway market, considering the high growth rate in the sector due to rapid urbanization and govt. investments in railway infrastructure.
The railway components segment including brakes is very critical and quality and reliability make a big difference. Sona BLW can set its R&D limit to improve product quality or create innovative products in this segment, says Philip Capital. Lastly, barriers to entry take the form of a long and complex supplier approval process, which characterizes the railway equipment market, making this acquisition a more efficient means through which Sona BLW can enter the market. of railway equipment than organic growth efforts.
Management is confident that the competency of the existing RED management team would be a critical factor in ensuring an orderly transition and sustained operational performance.
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