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The fertiliser industry rarely sees any excitement. But things have suddenly turned thrilling for the sector with two leading players fighting over another company. Deepak Fertilisers and Petrochemicals Corporation Ltd (DFPCL) and Zuari Agro Chemicals are eyeing the same company-Vijay Mallya-controlled UB group's Mangalore Chemicals and Fertilisers. Just when it seemed that the battle was over with Deepak Fertilisers acquiring a large stake in MCF, Zuari's Saroj Poddar, the soft-spoken strategist, upped his game by increasing his stake by another 3.5 per cent in the company. Clearly, interesting times are ahead as neither of the two companies is going to let go of MCF easily.
For Deepak Fertilisers, MCF is more than just a strategic investment. While Somnath Patil, president and chief financial officer of the Pune-based company, does not want to reveal much fearing market implications, those close to the development say all the moves made by the company are for long-term gains with an eye on the future. "We have just got over 24 per cent stake in MCF and don't want to go aggressive. We are still to decide on our next course of action," Patil had told Business Standard.
On the radar
Deepak Fertiliser's interest in MCF reflects the new thinking in the company since S C Mehta took over as chairman. While Mehta has been involved with the company for several years, it was only eight months ago after the retirement of his father that he became the chairman. "He instills entrepreneurship in everybody and that is reflected in all the people who are part of the senior management," a Deepak Fertilisers official says.
On July 3, Deepak Fertilisers bought 24.46 per cent stake in MCF at Rs 61. 75 apiece, totalling Rs 180 crore via open market buys. Delhi-based Burman family, too, sold its shares to Deepak Fertilisers. The Mehtas are good friends with the Burmans and that played out well during the open-offer buy when the latter sold their shares to the Deepak Fertilisers chairman. "The Burmans were in MCF as portfolio investors since fertiliser is not their core business and they were waiting to get a good value. Mehta has been good friends with them and, after a couple of meetings, the Burmans were happy to exit MCF at a good price point," the official adds.
Many say Mehta has bought the shares at an overrated price, but the person close to the development says, "When we set our sight on any company, we do our home work well. So we always knew till what point we could stretch ourselves and, given the gains from MCF, we think the price is valid."
MCF is a prized company because of its exponential growth in the last few years. From a company with a net worth of only Rs 194 crore in 2003-04, MCF's net worth has zoomed to almost Rs 600 crore now. Like all other industries, in the fertiliser sector too, there are two ways to grow: "One, you expand your own business in whatever manner possible and second, you take the inorganic route to feed your portfolio expansion and gain a foothold in the future businesses," the official says. Mehta has taken to pursuing both the strategies-expanding existing facilities and diversifying at the same time. While Deepak Fertilisers' expansion plans for Taloja plant, which will see an investment of around Rs 360 crore in the next couple of years, fills its expansion needs, acquiring MCF will meet its requirement for diversification. There is no doubt the acquisition will have many advantages for Deepak Fertilisers.
The positives
"One of the primary gains from MCF is that it is a decent player in the urea business and this would enable us in diversifying. Urea business has its share of subsidies, unlike other fertilisers, which makes the business more stable," the person adds. There is also potential for exponential growth in the segment with demand still running ahead of supply. India's annual requirement for urea has been pegged at around 30 million tonne, but domestic industry is capable of meeting only 22 million tonne of this demand. "Indian farmers still want to play it safe and they treat urea as the best bet. So urea business will provide huge gains in the coming days for Deepak if it manages to take over MCF," says a fertiliser analyst.
MCF has the capacity to produce 380,000 tonne of urea annually which can be scaled up further. MCF owns a 60-acre plot adjacent to its plant which is lying vacant. "The urea business will see expansion given that there is a lot of domestic demand that has to be met. At a time when land is the most difficult thing to get, a vacant 60-acre plot would be the ultimate bonus," the Deepak Fertilisers official adds.
Gains in the complex fertiliser business, too, can be handsome if MCF is acquired. Deepak Fertilisers currently has a capacity to produce about 180,000 tonnes of complex fertilisers. In comparison, MCF has a capacity of 260,000 tonnes. The additional capacity will not only help Deepak Fertilisers strengthen its position in the market but will also widen its product range. The acquisition will also expand the company's reach to newer markets.
"Deepak Fertilisers is present largely in the north and west Indian markets, but MCF will enable it to get a foothold in Karnataka, Andhra Pradesh and Tamil Nadu, areas where MCF has a strong position," explains the fertiliser analyst. At present, 40 per cent of Deepak Fertilisers' revenue comes from the agri & farm solution business, while the second biggest contributor, at 38 per cent, is the mining chemicals business. The rest comes from the industrial chemicals business and other businesses like real estate. The company is also the largest producer of technical ammonium nitrate, a compound used in mining, says an official
In a sector where there aren't too many companies worth investing in, MCF has evoked interest like no other. Saroj Poddar, chairman of Adventz Group, who now owns about 13.5 per cent in MCF, had told this newspaper that MCF was the ultimate company to acquire keeping in mind the synergies it offers. It has been on his radar for quite some time. However, the "Mehtas believe in ethical play; so they never did something that would seem hostile and they still maintain that. So efforts are on to arrive at an agreement with MCF's management," the Deepak Fertilisers official says.
Surely, MCF has ticked all the boxes in the Deepak Fertilisers check list. But with Poddar too upping his ante in the race, the next couple of months will see a lot more action.
THE TAKEOVER GAME
- April 2013 Zuari Agro 's Saroj Poddar acquires 10 per cent stake in MCF
- July 3, 2013 Deepak Fertilisers announces a surprise entry by buying 24.46 per cent in MCF in an open offer
- July 10, 2013 Poddar adds twist to MCF saga by increasing stake by another 3.5 per cent
THE GAINS FROM MCF
- MCF will enable Deepak Fertilisers to diversify into the urea business.
- It will widen its product range in the complex fertilisers business.
- The acquisition will strengthen its presence in Andhra Pradesh, Karnataka and Tamil Nadu
- MCF owns a 60-acre plot adjacent to its existing facility that can be used for further expansion. This land bank is a big draw for the company
