Why Zuari wants Mangalore Chem?

SK Poddar of Zuari is known to be close to Vijay Mallya, promoter of MCF; investment will reap benefit over the long term

The office of Saroj Poddar, chairman of Adventz group and son-in- law of K K Birla, in the majestic Hong Kong House in Dalhousie, the central business district in Kolkata, is done up in retro style with elements of modernity thrown in. Likewise, for his business, growth has come in a slow and steady manner with acquisitions becoming a part of the strategy only lately.

However, Poddar knows that there are not many acquisition targets in the market. So, he is pursuing the available opportunities with all his might. Last week, he bought nearly 10 per cent stake in Mangalore Chemicals and Fertilisers (MCF) for Rs 44 crore. "We didn't want any of our competitors to get it," says he.

Poddar is known to be close to Vijay Mallya, the promoter of MCF. The shares that he bought were pledged by Mallya to the lenders of his troubled Kingfisher Airlines. For Mallya, it was probably a comfortable proposition. Poddar had close relations with Vijay Mallya's father, as they were together on the board of a company. But Poddar is now vying for majority control.

However, he says he will not do anything which might appear as a hostile takeover. "The ball is in Vijay's (Mallya) court and he has to take a call," he says.

Zuari Fertilisers and Chemicals, the group's fertilizer arm, has been eyeing inorganic growth for quite some time. It had initiated talks with Nagarjuna Fertilisers and Chemical, which didn't work out. Poddar is now keen to acquire MCF for several reasons.

"Both of us operate in the same territory; we have synergistic advantages. We believe if there is some synergy between the two companies or some partnership then we can have economies of scale on all purchases which both companies will benefit from ," says he.

As of now, fertiliser companies import majority of their raw materials from countries like Saudi Arabia, Morrocco, Russia, Qatar and Jordan. Zuari's move, therefore, is strategic as placing bulk orders with foreign companies will help it gain better terms on prices.

MCF, which makes chemical-based and other complex fertilisers, has a capacity to produce 379,500 tonnes of urea and 255,500 tonnes of DAP and other complex fertilisers in a year. The company also has good manufacturing facilities and market reach, given its proximity to the port and road infrastructure in Mangalore, say analysts.

For Zuari, that makes for a good fit as it has a facility in Goa which has a similar product profile. As both the companies are closer to ports, analysts say they could leverage their product profile to import raw materials at a cheaper rate.

Control over MCF will strengthen Zuari's position in Karnataka and Maharashtra. Competition in the fertiliser market is not intense as demand is more than supply. The market has its own dynamics with each company holding a dominant position in one region or the other. For instance, Zuari is strong in Maharashtra and Karnataka. "This investment will reap Zuari benefit over the long term," an analyst at Sharekhan says.

It was with the intention to strengthen its market share that Zuari in 2010 had tried to take over Nagarjuna Fertilisers and Chemicals, a leading name in the industry (Tata Chemicals and Coromandel International are the other big names). Poddar had acquired over 6.5 per cent stake in the company. But later Nagarjuna Fertilisers went through restructuring and as a consequence the group's unlisted firms had to be merged with it taking the promoters' stake to 51 per cent. It was 38 per cent before the consolidation of the business, says the analyst. This made the takeover attempt futile.

Now may be the right time to acquire MCF. The company's current market capitalisation is Rs 504 crore. For a company with an annual turnover of Rs 3,700 crore that's rather small. It posted a profit of Rs 69 crore (for FY12). A sore point could be the company's huge debts. MCF's debt at Rs 1,323 crore is almost 2.4 times its equity capital. However, if the cash in the company's books, as well as advances to the government (in the form of subsidy) totalling Rs 896 crore is adjusted, the net debt drops and thus the valuations become attractive. After taking this into account, the enterprise value of the company works out to Rs 823 crore, merely 0.2 times its sales and four times its operating profits. That apart, the company is investing Rs 340 crore in capex.

But Poddar is taking things slow and easy. He is in no hurry to take control. "We are going to meet in due course, but there is no immediate hurry from any end. We certainly don't intend to buy any more shares without discussing with Mallya. We value our friendship, so there has to be full consent," he says.

Poddar further explains that the investment would unlock value for shareholders in the long term. Over 75 per cent of Adventz's revenue comes from farm and chemical businesses and that is an indication that the investment in MCF was made by Zuari in anticipation that there would be exponential growth in the future.

The time may be just right for Poddar.