Investor's Eye
[July 04, 2013] | | |
| Summary of Contents
VIEWPOINT Deepak Fertilisers & Petrochemicals Corporation Deepak Fertilisers buys stake in Mangalore Chemicals; win-win situation Key points -
DFPCL acquires 24.5% in Mangalore Chemicals and Fertilisers: Deepak Fertilisers and Petrochemicals Corporation Ltd (DFPCL) has acquired 28.99 lakh equity shares of Mangalore Chemicals and Fertilisers Ltd (MCFL) having face value of Rs10 each, representing 24.5% share capital. The transaction is valued at Rs179 crore, translating in an average price of Rs61.75 per share paid by DFPCL. The transaction was routed through SCM Soilfert, a wholly owned subsidiary of DFPCL. After the recent block deal, DFPCL has emerged as the largest shareholder of MCFL ahead of its promoter Vijay Mallya, who holds 22% stake (of which 58% is pledged), and another big shareholder Zuari Agro Chemicals, which holds 10% stake in MCFL. -
Stake buy likely to have positive impact on DFPCL's expansion plan: DFPCL's strategic move to buy stake in the southern-based MCFL is a win-win situation for the company and will have following benefits: (1) it will help DFPCL to increase its product portfolio and to enter the urea segment where currently it has no presence (it manufactures only complex fertilisers, ie 24:24:0); (2) the stake buy will help DFPCL to penetrate deep in the southern market (Karnataka, Tamil Nadu and Kerala) through the extensive and well-penetrated distribution network of MCFL; (3) MCFL has a huge ammonia storage capacity and a jetty, which can be beneficial for DFPCL (key raw material for DFPCL is ammonia); and (4) MCFL has big chunk of excess land, ie 50 acres, on which expansion of urea or complex fertilisers can be done. -
Scenario analysis of the possible change in management control: In absences of any clarity on who will control the management of MCFL after DFPCL bought 24.5% stake, which is higher than the promoter's stake of 22%, we are assuming three likely scenarios on the management control going ahead. Scenario I: MCFL's management control will remain with the existing promoters only. Scenario II: DFPCL will buy additional 1.5% stake from the open market or from pledged shares, which will trigger the open offer and the controlling stake will be transferred to DFPCL's management. Scenario III: MCFL's promoter (11%, without considering the pledged shares) may sell its stake to either of companies (DFPCL and Zuari Agro Chemicals) and exit MCFL. -
Valuation: synergy benefits for DFPCL; probability of open offer and better price discovery in MCFL: MCFL is a good strategic fit for DFPCL and consequently we see buying of majority stake as a positive move if the company is able to accrue the synergetic benefits and gain control of the business. The other shareholder, Zuari Agro Chemicals, has already publically stated that it has no intentions to get into a hostile takeover of MCFL. Thus, we believe that Scenario II (probable increase in stake followed by open offer by DFPCL) is quite realistic, which is a win-win situation for minority shareholders of DFPCL (better business prospects and utilisation of free cash) and MCFL (better price discovery).
SHAREKHAN SPECIAL Q1FY2014 Banking earnings preview
Earnings growth to remain subdued for PSBs Key points -
Divergence continues in earnings performance of private and public sector banks: For Q1FY2014 Sharekhan's banking universe is expected to report a flattish growth in earnings (up 1.3% year on year [YoY]) due to a weak earnings performance of the public sector banks (PSBs; down 9.6% YoY). On the contrary, the private sector banks are expected to report a healthy growth in their earnings (up 22% YoY). Higher provisions and a subdued net interest income (NII) growth will continue to affect the earnings of the PSBs. -
Core performance remains weak: Led by a slower loan growth and subdued margins the NII of our banking universe is expected to grow by 9.8% YoY. The NII growth for the PSBs is likely to be modest (up 5.3% YoY). However, a strong growth in the treasury income (due to the softening of bond yields) will offset a slower growth in the fee income and cushion the overall earnings. -
Asset quality pressure persists: We expect the asset quality pressure to continue for the PSBs as the macro-economic environment remains worrisome. The outstanding restructured loans are expected to inch up for both private banks and PSBs as corporate debt restructuring (CDR) pipeline continues to soar and stress remains in many sectors. But we expect the private banks to maintain the edge over the PSBs in terms of asset quality. The provision expenses will remain elevated due to a higher provision requirement for restructured loans. -
Outlook: Given the weak macro-economic environment, the operating performance of the banks is likely to suffer though the private banks are expected to perform relatively better. Asset quality pressures are likely to continue for a couple of quarters which will keep the cost of credit high. Also, the rising pressure on the current account deficit implies cautious monetary easing by the Reserve Bank of India (RBI). However, the banking stocks have corrected sharply and partly reflect the macro-economic and regulatory concerns. We prefer ICICI Bank (a strong operating performance), Federal Bank (attractive valuation) and Yes Bank among the private banks. In the PSB space we prefer State Bank of India (SBI; attractive valuation).
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