Indo Gulf merger with Indian Rayon
Indo Gulf (IGFC IN, CMP Rs170, Mkt Cap Rs7.7b, BUY) is to be merged with Indian Rayon (IR) in the swap ratio of 1 share of IR for every 3 shares of IGFC. This values the Indo Gulf share at Rs 206-a 21% premium to its closing price on Friday; at 14.7x FY06EPS and 4.4x FY06 EV/EBITDA.
I believe the strategic reason behind the move is to utilize IGFC's excess cash (almost Rs3b as on 31 March 2005 ) in IR's financial services business. The company's fertilizer expansion plans had taken a backseat after government's decision not to divest PSUs and delay in clearance of its broken-field capacity expansion.
I have reason to believe that IGFC's fertilizer plant will also be sold in the near future, as fertilizer doesn't seem to be a focus area for the group. Some companies are evaluating the plant.
The premium to market price paid by Indian Rayon substantiates our view that efficient fertilizer companies are being under valued by the market, given the short term uncertainties over government policies. We continue to remain positive on Tata Chem (TTCH IN, CMP Rs 190, Mkt cap Rs46b, BUY) , which is trading at 12x FY06 EPS and Coromandel Fertilizers (CRFT IN, CMP Rs245, Mkt cap Rs6b, BUY) , trading at 9.2x FY06 EPS.
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