Mangalore Chemicals & Fertilizers (MCF) is a Vijay Mallya
company with UB Holdings having 22% of which 11% are pledged for Kingfisher
Airlines (KA) loans.
I have been meaning to write on
this for the last few days which somehow got delayed. And it looks like a probable
opportunity has been missed, after today’s development (wherein Zuari Fertilizers
increased its stake). But in stock markets, there are always opportunities and
in the case of MCF, this can’t be truer. So it may be best to bide your time and then move in, if a window presents itself.
This is a risky bet and strictly
opportunistic. In early April ’13, MCF lenders (mostly SBI) sold 9.72% of its
equity after getting fed up of KA assurances on repayment @38.5/share. Zuari
Fertilizers (a Birla group company) picked up this stake. The share zoomed 20%
from 32 to 38.5 on that day. The next day it rallied further 15% to 45 (41% in
2 days).
A few days back, Deepak
Fertilizers & Chemicals (DFC) bought close to 25% stake in the company
@62/share (to avoid the 25% limit of the open offer). Prior to that period, a
month or so back, the share was @40. Post this news it has again started
correcting to 55 levels since there is no open offer yet. However today there is a new twist to the story and Zuari has again swung into action. So the equation as of today is UB
group -22 % (11% pledged), Zuari – 13% and DFC – 25%, so nearly 60% is with 3
main entities.
One key thing that MCF has done
is to change their process to use natural gas as the feedstock rather than
naphtha and fuel oil and they have entered into an agreement with IOC whereby
they will be getting imported from the Kochi terminal of Petronet LNG. This is likely to improve
their margins going forward. Secondly, once the govt. pays the subsidy, this
will further add to their bottomline.
Thirdly, while MCF’s 2012 annual
report doesn’t specify the land bank held, it is said that it may run up to 400
acres or more in and around Bangalore.
The current market cap of the
company surely doesn’t cover all of the above 3 factors. Going by the numbers,
despite its small size, MCF currently has an EV/EBIDTA of 8.10 (Enterprise
value per operating income, a measure of the company’s strength vis-a-vis its
peers). This is very good when compared to powerful fertilizer peers such as
Coromandel whose ratio stands at around 6.
Considering that fertilizers
& chemicals is not an area Mallya would be keen to retain, it is likely
that sooner or later, the 22% stake will come up for sale. Besides, since 2
large corporate in the same domain have a stake, it is unlikely that they will
retain it. One of them is likely to make way for the other on lucrative terms
and the other may well take it up to consolidate its holdings. Even last year,
companies like MRPL (a subsidiary of ONGC), Zuari and Chambal Fertilizers had expressed
interest in buying out Mallya’s share. At that time Mallya held on but the
situation is vastly different now with sources of revenue for Mallya drying up
what with even United Spirits gone out of his hands.
All in all, interesting times are
ahead for MCF. And this seems to be playing out with Zuari increasing its stake
from 10 to slightly above 13%. After having spent upwards of 100 cr. on buying
a near-25% stake, it is unlikely that Deepak management will just sit on the
sidelines.
So once the current news flow subsides,
the share is likely to be available at sub-50 or even lower levels, where it
can be considered as an event-driven bet. Returns could well turn out to be
rewarding, going by past experience on take-over battles. Even in case of a
negotiated settlement between the 2 large shareholders, it is unlikely that
either will let go without its pound of flesh
As I had said at the beginning of the initial post on MCF, it may be best to bide your time and then move in, if a window presents itself. I think the window has presented itself now. The MCF story is getting interesting by the day.
ReplyDeleteFirst, a few days back Vijay Mallya claimed that he is willing to buy the stakes of both Deepak Fertilizers (nearly 25%) as well as Zuari Fertilizers, a unit of Zuari Agro Chemicals (16.43%). Where he is going to get the money from is anybody’s guess. I guess he has his sources of funds. Mallya himself has 22% stake currently in MCF.
Then 2 days later, Zuari chairman Saroj Poddar declared that if MCF did not get into a JV with his Zuari Fertilizers, as agreed when he first bought the stake from SBI who sold it to recover a part of its unpaid KF dues against which these shares were a collateral, he would sell his shares in the open market to the highest bidder. He had bought the shares @48.2 while Mehtas had bought it at 61.75/share. MCF currently trades @53 and was @37 in mid-June.
Meanwhile, grapevine in the market has it that the Mehtas of Deepak Fertilizers could make an attractive offer to Poddar for his shares which he may well take up. It could then become a bidding war between Mallya and Mehtas for a controlling stake (last time around when this sequence of events first started, the bidding war was expected between Poddar and Mehtas to buy out MCF, but after this clarification, that is put to rest).
So from 37 in mid-June, it went all the way to 68 in mid-July when this take-over saga began. Interestingly while Poddar bought his share in tranches at an average cost of 48.2, Mehta had to pay 61.75. It had an all-time high of 73 in mid-July. So there is still enough steam left in this.
An interesting phase thus lies ahead for MCF in the days ahead. And buying now (@53) or on further dips should surely reward the buyers (at least modestly if not handsomely) in the days to come once its fate is decided one way or the other.
Note that this is a purely news-driven counter and I surely wouldn’t consider it a portfolio bet. Buy, make your pile and get out. Fertilizer as a sector is prone to govt. interference and hence is best avoided as a long-term investment.
So MCFL war has again picked up post the receipt of all the regulatory clearances some time back. Yesterday (26-Sept) it was locked at the UC @88. In 1 year, it has gone up by more than 50% from 53 on 01-Oct-13, and nearly 200% from Apr. '13, when I had given a call to accumulate this share, anticipating the sequence which has now played out very well indeed.
ReplyDeleteWhile there is still scope for the price to go up from here (since Deepak Fertilizers has announced the open offer price of 93/share, about 48% more from its earlier price of around 68), it may not pay to be too greedy. Already the share has gone thru the roof and is now purely event-driven and beyond fundamentals, quoting @P/E of about 15 which, for a fertilizer company, is very high. So people who had bought it around 50-levels or below over the last year or so, should certainly offload a part of their holding and sell on every rise, without actually waiting to tender the shares on the open offer, which would be counterproductive because of the tax implications. Once the winner of the takeover battle is declared by mid-Oct, it is likely to go down well below 50-levels where it traded before this chain of events started (after all, nothing has changed fundamentally for this share). And it must also be remembered that monsoon has not really been great this year. So fertilizer companies are likely to feel the pressure in the coming quarters.