Despite impressive FY2014 results, Deepak Fertilisers faces several challenges including a bidding war and gas supply constraints. But MD Sailesh Mehta is confident of powering through
In April, Sailesh Mehta was ready to conquer the world. Financial year 2014 had been among the best for Deepak Fertilisers & Petrochemicals Corporation Limited (DFPCL) with revenues growing 46 percent to Rs 3,920 crore and net profits touching Rs 250 crore, up by 90 percent. Armed with these numbers, he had launched a takeover bid on the Rs 3,310-crore Mangalore Chemicals and Fertilizers (MCF) in April 2014, a company in which DFPCL was already a stakeholder with 25.3 percent. They now made an open offer to acquire 26 percent more for a majority stake of 51 percent, at Rs 63 per share.
The company, Mehta felt, had natural synergies with DFPCL in terms of product profile (urea-based fertilisers which Deepak did not have) and geography (stronghold in Karnataka).
But within a few weeks, DFPCL found itself challenged on two fronts. One, a rival combine of the Adventz Group-owned Zuari Agro (which had a 16.43 percent stake in MCF) and Vijay Mallya, the controlling stakeholder with 22 percent, had entered the ring with a higher offer at Rs 68.55. Two, on May 15, the government had cut the natural gas connection to DFPCL. With gas supplies shrinking in the domestic market, the government wanted to divert available supplies to urea manufacturing companies, which produce subsidised fertiliser. The move led to huge cost overruns for Deepak Fertilisers.
But the Mehta Forbes India met was optimistic. “I see a long journey ahead for Deepak Fertilisers. Many people feel that I have woken up suddenly and become a very aggressive businessman. That is not the case. As you focus on a key area, you start to see a clear path. We expect to get over our immediate problems but our eye is clearly on the big picture,” Mehta said on June 4, during an interview in his Pune office.
This “big picture” is to look beyond fertilisers, which are intrinsically linked to about-to-explode domestic gas prices.
The UPA government had announced a doubling of gas prices from $4.2 per mmBtu (million metric British thermal units) to $8.4. Even though the new government is taking a relook at the pricing, one thing is clear: Gas prices will be higher than before.
Currently, a third of Deepak’s turnover is associated with fertilisers. The other two-thirds come from chemicals and technical ammonium nitrate (TAN). His plan, he explained, is to leverage on the buoyancy in both these segments in order to hedge himself against the problems related to the fertiliser business.
Consider that the spurt in DFPCL’s growth had been boosted by an increase in demand for TAN (used as a blasting material for mining and explosives) and methanol (used by the pharma industry, for which international prices had shot up). These comprise the chemicals business which saw a growth of 49 percent against the 41 percent for the fertiliser business. Not surprisingly, over the last year, the stock has moved up by 60 percent as against the Sensex’s 30 percent.
THE BIDDING BLUES
But that was in April 2014. Today, the immediate concern for Mehta is the bidding war he finds himself entangled in. Mallya’s ownership of MCF was “one of the biggest reasons to put a bid on MCF”, he says. “Dr Mallya has a controlling stake in the company but it is not his core business. The MCF business is a good fit for us in terms of geography and product profile.” That was why, in June 2013, DFPCL, which already owned 24.5 percent, raised its stake to 25.3 percent; in April 2014, it made its open offer. But it did not account for competition. Mehta had little choice but to hold back.
Even as his next move is awaited, analysts continue to be perplexed by the value of the bids. Mehta had pegged it at Rs 63, at a price-earnings (P/E) multiple of 10, which was double the valuation of Deepak Fertilisers which trades at a multiple of 5. The rival group decided to up the offer price, taking it to 11.5 times earnings. DFPCL is traded at Rs 144—0.56 times its book value—while MCF is at Rs 73.90, at 1.34 times. (Values are as on June 13.)
“You are getting these businesses at a very low price in the stock market, where the market capitalisation of the company is lower than its sales. This is a rare thing for a company with the size of Deepak Fertilisers,” says Jayesh Parekh, an independent investor. The market capitalisation of DFPCL is at Rs 1,367 crore against its sales of Rs 3,920 crore.
(This story appears in the 11 July, 2014 issue of Forbes India. To visit our Archives, click here.)