Mangalore Chemicals: More gains in the offing for shareholders

With valuations attractive and promoters facing financial issues, hopes of takeover are gaining ground

The UB Group-promoted Mangalore Chemicals and Fertilizers came into the limelight after its rival, Zuari Fertlisers and Chemicals (a subsidiary of Zuari Agro Chemicals), bought a 9.72 per cent stake in the company from the open market (the lenders to UB group sold the pledged shares of promoters to cover their exposure to Kingfisher Airlines). The move has raised hopes of a takeover. Due to the interest shown by a few large companies, as well as good valuations, it has led to a spike in the share price of Mangalore Chemicals, which has gained 25 per cent in the last one week to Rs 41 currently.

Mangalore Chemicals’ current market capitalisation is Rs 487 crore, not much for a company with annual turnover of Rs 3,700 crore and net profit of Rs 69 crore (for FY12). Although the debt of Rs 1,323 crore (almost 2.4 times its FY12 equity) seems large, 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 look 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. Although in the nine months ended December 2012, the company’s net profit is down 10 per cent to Rs 50 crore, it is not worrisome. That apart, the company is investing Rs 340 crore in capex, which makes the valuations attractive, and should help sustain growth. Notably, the company generates a healthy return on equity (RoE) of 16 per cent and in the last 15 years, has grown consistently in terms of profits and turnover; it has never reported a loss on an annual basis.

Mangalore Chemicals manufactures chemical-based and other complex fertilisers. It had a manufacturing capacity of 379,500 tonnes of urea and 255,500 tonnes of DAP and other complex fertilisers as on March 31, 2012. Analysts believe the company has good manufacturing facilities and market reach, given its proximity to the port and road infrastructure in Mangalore.

Zuari Agro Chemicals’ facilities, too, located in Goa, have a similar product profile, which is why analysts believe Mangalore Chemicals’ acquisition could be a good fit for Zuari. Both companies have the advantage of proximity to port, which helps them in importing raw materials in a cost-efficient manner.

However, in terms of size, Zuari Agro is bigger with an annual turnover of Rs 6,188 crore and a profit of Rs 104 crore in FY12. If Zuari is able to gain control of Mangalore Chemicals, the move will make it one of the largest fertiliser players in the industry and expand its reach, particularly in South India. Analysts also believe synergies can be exploited in terms of cost and other overheads. However, a lot of this will depend on the final acquisition price.

“I think, eventually, the company will be sold to the Zuari (group), given the current financial conditions of the Mangalore Chemicals’ promoters. It seems the promoters of the company are looking to sell their stake at a higher price compared to the current ruling price of the company,” says S P Tulsian of sptulsian.com.

The acquisition by Zuari or any large player should be positive for Mangalore Chemicals’ shareholders (in terms of financial strength and valuations), who would do better by staying invested in the company.