Bidding war starts

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

Beaten down way too much

Over the last year or so, the market has been on what can best be described as a roller coaster ride, going up by 500 points one day and down 300 points the next. After crossing 20K, it again sunk to 18K in a short while and has again managed to come above 19K. How things move from here will be driven by FII money/liquidity and govt.’s reforms push which all of a sudden appears to have moved into 3^rd gear.

Amidst these gyrations of the market, there have been many stocks which though fundamentally good have sunk to new depths largely due to the news flow surrounding them. Some of them are MNC stocks which were very much in the news due to being considered as delisting candidates. However, when the delisting bubble burst due to the unrealistic expectations of the investors who demanded astronomical valuations defying economic rationale, and the MNCs didn’t think it worthwhile to pay them those, a majority of them made a beeline for the OFS route to reduce their shareholding to 75% or below. Of course a few like Fresenius made a smart play by doing the OFS at a relatively low price and then 6 months or so later coming out with an open offer at a substantial premium to the OFS price thereby hugely benefiting the subscribers of the OFS. This also meant that the number of shares that they had to corner to delist also reduced significantly than from the last time. While the spirit of law was followed in letter, the spirit was certainly given the go-by.  It remains to be seen if other MNCs take a cue from Fresenius Kabi and take a similar route or if the regulator sees thru this smart move and takes some concrete steps to avoid them.

One such beaten down stock which has become attractively valued now is Styrolution ABS.

This was Ineos ABS earlier and was considered as a top delisting bet since the parent held close to 87% of the shares (Parent held 83.33% stake in Dec’11 but made an open offer to the shareholders @606.8 for balance 16.67% stake but garnered only 4% of the shares making it 87.33%).  And it reached levels of 800 at the peak frenzy. However, as mentioned above, things didn’t quite pan out as expected and this too went the OFS way to reduce its stake. But the interesting part is that it priced the OFS at around 410, a discount of 23% to its then last traded price and @P/E of just around 11, way too low for an MNC stock.

Styrolution ABS is a leading manufacturer of an engineering plastic namely styrene monomer, polystyrene and ABS. The company is a 50/50 joint venture between BASF (the German MNC) and INEOS ABS formed by combining the styrenic business of two of the largest global chemical companies. In the domestic market, Styrolution is the market leader and holds 60% market share in ABS resins segment and 68% in SAN resins segment. And it has an opportunity to reap the benefits of demand supply gap (met by imports) which has persisted for long and continues to exist. Further, CRISIL Research estimates that the supply of ABS would grow at 17% CAGR in order to meet the demand growth of 10% CAGR during CY2010-15E, thus providing revenue visibility to the company.

As per the public disclosures made by the company, FIIs predictably have cornered a large chunk of the OFS shares, squeezing the public shareholding further. So a re-run of Fresenius story can’t be ruled out.

All in all, extremely cheap valuations for an MNC company and good future prospects (demand as well as pricing power being a leader in its segment) make this a reasonable bet even for a conservative investor. A delisting offer would be an added bonus for this stock.