The Hindu Business Line : Birla group restructuring — Indo Gulf shareholders get a good deal

IT was precisely two years ago, in July 2003, that the Aditya Birla group decided to separate the fertiliser and metals businesses of Indo Gulf Corporation, to create two companies that could better focus on their respective businesses; resulting in the birth of Indo Gulf Fertilisers.

Sunday's merger proposal will reverse the process, with the fertiliser business set to re-enter a medley of disparate businesses under Indian Rayon's fold.

Limited growth opportunities in fertilisers, the sizeable free cash flows that Indo Gulf generates from its operations and the promoter group's significant stake (of 58.2 per cent) in the company, were probably the key reasons why Indo Gulf was chosen to be part of this round of restructuring at the Birla group.

After the merger, Indo Gulf's annual cash flows of about Rs 80 crore from operations and its investment book, valued at about Rs 280 crore, could be channelled into emerging businesses such as financial services, IT or garments.

To be fair, efforts by domestic producers such as Indo Gulf to grow the fertiliser business have been stymied at every turn. The three-stage group pricing mechanism, which was supposed to usher producers into a decontrolled regime, has remained frozen at Stage II for two years now. Freedom for producers in marketing urea, promised by 2005, has also been postponed.

Since this July, a part of the domestic urea requirements are being met by imports from OMIFCO, an overseas joint venture, capping the likely offtake from domestic producers. Indo Gulf's proposal to expand its urea capacities has been awaiting government clearance since April 2004.

For Indo Gulf shareholders, the key positive from this deal is a favourable swap ratio for the merger. The Indian Rayon stock is now trading at about Rs 580. Assuming this price is maintained, the swap ratio (at three shares of Indo Gulf for every one of Indian Rayon), translates into an exchange price of about Rs 193 per share for Indo Gulf shareholders. This values the company at a generous multiple of about 15 times its 2004-05 earnings and 1.5 times its book value of Rs 134. Indo Gulf's peers now command much lower price-earnings multiples of 9-12 times earnings. A voluntary open offer by the Birla group to mop up a 20 per cent stake in Indo Gulf Fertilisers in August 2003 was made at Rs 75 per share.

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