Moneycontrol Pro Panorama | Climbing up the value ladder

Businesses get commoditised over a period of time.

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Businesses get commoditised over a period of time. When that happens, companies can protect and grow their businesses by climbing the value chain, by adding new product categories or strengthening existing ones. The latest acquisitions made by Metropolis Healthcare and CEAT are examples of how this thought process can play out.

Metropolis is acquiring oncology-focused diagnostic services provider Core Diagnostics. Earlier, CEAT has said it has entered into an agreement to acquire off-highway construction equipment bias tyre and tracks business from Michelin.

Metropolis and CEAT are in the same business as the target companies. Metropolis offers cancer tests and CEAT sells off-highway tyres.

Even so, Core Diagnostics will expand Metropolis’s presence in high end oncology tests and in the northern and eastern parts of the country. As Abdulkader Puranwala, analyst at ICICI Securities, explains, the general diagnostics business is increasingly coming under pressure from new entrants — hospitals, pharmacies and online based service providers. Amid growing competition, one option for diagnostic service providers to strengthen their business is by deepening their presence in specialised tests. The share of oncology revenue in Metropolis's total sales will grow from 4 percent to 10 percent, post the acquisition of Core Diagnostics.

Similarly, the acquisition of Camso brand’s business from Michelin will give impetus to CEAT’s off-highway tyre business. The Camso brand has a strong presence in original equipment and replacement tyre markets in North America and the European Union. The business potential in the off-highway tyres has been well demonstrated by Balkrishna Industries over the past 10 years.

The acquisition will expand CEAT’s revenues by 15 percent. Notably, the acquisition helps CEAT expand its relatively high profit margin off-highway tyres business, crucial in the current context of heightened volatility in raw material prices. “CEAT’s acquisition comes at a time when most tyre firms are striving to foray into making niche speciality tyres. They are moving towards improving brand equity and higher premiumisation in the product mix,” writes Vatsala Kamat. Do Read.

Of course, acquisitions are rarely without risks. Dr Lal PathLabs faced hiccups in integrating and scaling up Suburban Diagnostics. Oncology based specialised tests are doctor prescription driven. Ensuring close relations with doctors and hospitals continue under a changed management is vital for Metropolis. For CEAT, the Camso acquisition comes with two manufacturing plants in Sri Lanka and customers in several countries across the globe. A smooth transition is vital to derive the acquisition's benefits and ultimately translate into gains for investors of the acquiring companies, too.

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