The Charms of Mangalore Chemicals for Deepak Fertilisers

The companies can plan joint sourcing of raw materials, which can bring economies of scale

May 06--What does Deepak Fertilisers and Petrochemicals Corp. Ltd see in Mangalore Chemicals and Fertilizers Ltd? Despite the resistance from Mangalore Chemicals' management, Deepak Fertilisers has launched an open offer to acquire a controlling stake in it, sending the shares of both the companies higher by 15-19% since the announcement. It is not clear who will gain control of Mangalore Chemicals though, because Saroj Poddar's Adventz Group is also looking to increase its stake in the company.

If successful, the acquisition could open new growth avenues for Deepak Fertilisers. Most of Deepak Fertilisers' existing plants are running at near-full capacities. True, the company has headroom to increase utilization levels in the chemicals business, which will help it deliver healthy growth rates in 2014-15, but beyond the current fiscal, delivering high growth will be a challenge for Deepak Fertilisers, Prabhudas Lilladher Pvt. Ltd said after the company's third-quarter results. The company is building new fertilizer capacities, but these are likely to come on stream only in December 2016, the broking firm added.

Mangalore Chemicals gives Deepak Fertilisers entry into urea manufacturing and the southern markets. Deepak Fertilisers manufactures complex fertilizers. Mangalore Chemicals mostly makes urea. Together, they can look to address the wider needs of farmers.

Apart from access to new markets, what Deepak Fertilisers may be interested in is the potential of Mangalore Chemicals. The later has ammonia storage capacity and a jetty, which can be used to import ammonia, a key raw material for Deepak Fertilisers, Sharekhan Ltd said in a note.

Also, Mangalore Chemicals has excess land that can be used to build fertilizer plants. Proximity to infrastructure facilities such as ports can be an added advantage. The companies can plan joint sourcing of raw materials, which can bring economies of scale.

Analysts see numerous benefits if both the companies come together (there are similar benefits for the Adventz Group).

Meanwhile, a strong balance sheet has given financial muscle to Deepak Fertilisers. The company generates healthy operating profits and its leverage ratio has been shrinking. According to Emkay Global Financial Services Ltd, Deepak Fertilisers' net debt fell to 0.6 times equity in the December quarter from 0.75 times in the previous quarter.

The management is looking at ways to leverage the financial headroom, hence the aggressive push for Mangalore Chemicals. "We have a strong balance sheet, we are quite underleveraged, we have a good borrowing capacity, our Ebitda year-on-year also will be strong, so therefore we have enough scope to grow each of these (business) segments," Deepak Fertilisers told analysts early this year on its growth plans. Ebitda, or earnings before interest, taxes, depreciation, and amortization, is a measure of operating profitability.

A successful deal will boost investor confidence in the stock.

Copyright 2014 - Mint, New Delhi