Deepak Fertilisers’ open offer to acquire an additional 26 per cent of the outstanding equity of UB group’s fertiliser venture — Mangalore Chemicals and Fertilisers (MCFL) will close on October 20.
Soars 37% in a monthDeepak Fertilisers, which acquired 25.3 per cent in MCFL early in the year in a hostile takeover bid, upped its open offer price by 49 per cent to ₹93.6 apiece in September. This helped the MCFL stock to rally 37 per cent in the last one month. Interestingly, MCFL’s promoter — UB Group — has also teamed up with fertiliser major Zuari group to buy 26 per cent from the public at ₹81.6 a share, 13 per cent lower than the price offered by Deepak Fertilisers.
At the current price of ₹94, MCFL’s stock trades 16.3 times its 2013-14 earnings, implying a three-fold premium to State-owned fertiliser maker GSFC. The premium may not be justified for three reasons.
First, the subsidy on urea produced by MCFL has been temporarily suspended since early October, after the company failed to meet the September-end deadline for switching to gas (as feedstock).
Urea accounts for three-fourths of MCFL’s revenues.
Second, unlike GSFC, which is a debt-free company, MCFL had borrowings to the tune of ₹1,522 crore in its books as of March 2014; total debt as a proportion of shareholders’ funds stood at 2.4 times.
Third, the company’s long-term growth prospects hinge on the progress in gas pipeline connectivity, which has been hampered due to land acquisition issues.
Given the concerns and rich valuations, investors may be better off exiting the stock. Tendering the shares in the open offer will attract tax at the slab rate under which you fall. With the stock trading closer to its open offer price, selling the shares in the open market may be the most tax-efficient option.