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
