Deepak Fertilisers: Boost in case of MCF acquisition

Deepak Fertilisers, earlier in July last year, had brought 24.45% stake in MCF

The fortunes of Mangalore Chemicals & Fertilizers (MCF) could change for the better because of the entry of Deepak Fertilisers & Petrochemicals. The acquisition of a majority control by Deepak, if successful, will not only provide financial support to MCF but also drive common synergies like scale, cost, reach and product leadership. Deepak, in July, had bought 24.45 per cent stake in MCF, in the news for being under pressure because of the debt problems faced by its promoter, UB group. After Wednesday’s open offer by Deepak to acquire 26 per cent stake (30.8 million shares) in MCF at Rs 61.75 a share, MCF's shares closed with gains of 6.62 per cent at Rs 66, whereas Deepak's were up four per cent at Rs 125.

At the open offer price, the equity value of MCF works out to Rs 732 crore. At the offer price, calculations suggest Deepak is willing to buy MCF at 1.26 times its book value and 11 times net profit based on FY13 financials. The valuations may not look very cheap, but the Street believes, given the surplus of 50 acres MCF owns, enough for building one million tonnes of fertiliser-making capacity, the deal is reasonable.

Says Ravi Shenoy, AVP, mid-caps research, Motilal Oswal Securities, “If successful, it will give Deepak a controlling stake over Rs 3,400 crore of fertiliser sales, which will triple its fertiliser sales. Synergy benefits in distribution and contiguous markets make this bid more lucrative. The financial incentive of being able to consolidate MCF’s financials is a small benefit, for the Rs 190 crore (open offer cost) it proposes to spend is less than 50 per cent of its annual cash flows of Rs 400 crore.” Also, the comparative financial numbers are pertaining to FY13, a dull period for MCF. Deepak has a capacity of 180,000 tonnes of complex fertilisers. MCF has 260,000 tonnes of complex fertiliser capacity and 380,000-tonne urea capacity, implying huge scale. More, Deepak, largely present in the north and west, will also get a foothold in Karnataka, Andhra Pradesh and Tamil Nadu, where MCF has a strong position. There could be more benefits on the cost, products and distribution side as well.

Funding the deal is not a concern as Deepak had Rs 100 crore of cash at end-FY13. The remaining amount of Rs 90 crore, the Street believes, could come from debt, still reasonable, given its debt to equity ratio of 0.82 times. In interest coverage ratio, too, assuming a 12 per cent rate, the additional Rs 11-crore outgo with the existing pay-out is healthy at four times.