Coromandel International bought 56.28% stake in Liberty Phosphate. Further the company also made an open offer to acquire additional 26%.
“I think the fall in the share price is due to poor results posted by Coromandel International. However the acquisition is excellent and valuation at which the company has bought is reasonable,” Says SP Tulsian of sptulsian.com
Considering valuations and synergies, the deal should be positive for Coromandel International. For instance at Rs 241 a shares value of Coromandel International's stake comes to Rs 196 crore and the value of Liberty Phosphate works out to Rs 348 crore as against its current market capitalisation of Rs 308 crore.
This is also a reason considering the gap in valuations the share price of Liberty Phosphate has gone up in the morning trades by 3.43%. Importantly, Coromandel International has also made an open offer for a further 26% stake in Liberty Phosphate at Rs 241 a share, which means a further upside for Liberty Phosphate as a result demand for shares.
At the said price Liberty Phosphate is valued 0.7 times its FY12 sales and 3.6 times its operating profits which is considered to be reasonable. However on the basis on the book value to market cap the valuation works out to 2.4 times.
However that probably captures the low debt in the books of Liberty Phosphate and positive cash flows. Its debt to equity is 0.01% and it has been generating free cash flows in the last five years. Even the return ratios are impressive. Return on equity in FY12 stood at 47.36 and return on capital employed was 49%.
Interestingly these ratios are far better than compared to Coromandel International's return on equity and return on capital employed ratios at 23.11 and 29.02% in FY12. This means that the acquisition will in fact add to the existing return ratios of the Coromandel International.
In terms of the funding as well considering that Coromandel International is sitting on cash and cash equivalent of about Rs 1000 crore there is enough room for the company to fund the acquisition.