The Hindu Business Line : Colour Chem: Accept at Rs 467.2/Reject at Rs. 318

THE Clariant group — promoters of Colour Chem — intends to acquire up to 20 per cent of the equity through the open offer. The offer is at Rs 318 per share. A section of the shareholders is entitled to an annual interest of 10 per cent from 1998. This works out to Rs 149.62 (interest of Rs 199.62 less dividend of Rs 50 that has been paid between 1998 and 2004.) Only shareholders who have continuously held the shares from February 24, 1998, until the date of closure of this open offer, are eligible for interest; they would get Rs 467.62 per share. If the shareholding has changed due to the death of the original shareholder, succession or a legal directive (transmission and transposition of shareholding), the current shareholder would be entitled to the interest component.

At Rs 467.62 — a premium of about 60 per cent to the market price — the offer is attractive. Shareholders who are entitled to this price should accept the offer, as the stock may not attain such a valuation unless there is a substantial improvement in growth rates. At this price, the stock is valued at about 35 times its FY-05 earnings.

Shareholders of Colour Chem who are not entitled to interest can, however, retain their holdings. At Rs 318, the offer price is at a modest premium of 10 per cent to the market price. Staying invested may be appropriate as there could be scope for gains linked to an improvement in fundamentals.

Background to pricing: The offer comes in the backdrop of the acquisition of the global specialty chemicals business of Hoechst AG by Clariant AG of Switzerland. In 1997, the two companies had entered into an agreement for the transfer of the business. The acquirer, EBITO, was formed in May 2000 with Hoechst holding 51 per cent and Clariant International the balance. In October 2000, Hoechst's shareholding in Colour Chem was transferred to EBITO. In February 2001, EBITO became a 100 per cent subsidiary of Clariant International.

In 2002, SEBI directed Clariant International to come out with an open offer with November 21, 1997, as the reference date. The promoter group went on appeal to the Securities Appellate Tribunal (SAT).

SAT ruled that shareholders who have held the shares continuously since February 24, 1998, until the closure of the offer are entitled to interest. Clariant International appealed to the Supreme Court against SAT's order. It also sought a reduction in the interest rate if the SAT order was not quashed; in such an eventuality, it also appealed for reducing the dividend paid from the amount payable as interest. On August 25, 2004, the SC directed the promoters to pay interest only to shareholders who have held the shares continuously since February 24, 1998, until the offer's closure and also reduced the annual rate of interest from 15 per cent to 10 per cent. The order also allowed for a deduction of dividend from interest as sought by Clariant. After the SC's directive, the stock fell 20 per cent to Rs 250. It now trades at about Rs 290.

Business profile: Colour Chem supplies chemicals to a wide range of industries; this provides a cushion against a downturn in a particular industry. With the domestic textile industry on a growth phase, the potential for growth appears bright. With robust GDP growth, the speciality chemicals industry as a whole has potential to grow at a healthy pace.

Despite a marginal drop in revenues, Colour Chem has achieved a 43 growth in profits before taxes during FY-05. A cut on employee costs through a voluntary retirement scheme has shored up profitability. Its operating margin is higher than most of its peers in the speciality chemicals industry.

The decline in earnings was on account of a substantial drop in `other income' and a deferred tax credit in the earlier fiscal. Its speciality chemicals division has performed well in FY-05 with a growth of about 50 per cent in earnings before interest and tax, despite a lacklustre growth in revenues. Restructuring of its operations has also contributed to the higher earnings by way of a reduction in overheads.

In March this year, the parent company — Clariant — had chosen Colour Chem's manufacturing facility in Roha, Maharashtra, to cater to the requirements of agrochemical and pharmaceutical intermediates of its global operations. This provides a new revenue stream that could grow in size over the next few years. As the growth potential in the domestic market for these intermediates is limited, the outsourcing arrangement should benefit Colour Chem. These initiatives are likely to lead to a healthy growth in revenues and earnings. In this backdrop, shareholders who are not entitled to the interest component could retain their holdings.

The offer had opened on June 8 and closes on June 27. It is managed by HSBC Securities and Capital.

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