MORGANITE CRUCIBLE (INDIA) LIMITED (MCIL) is engaged in business of manufacturing and selling of silicon carbide and clay graphite and its accessories. Silicon carbide and clay graphite crucibles are used primarily as consumables in the manufacture of non-ferroalloys industries. Crucible is manufactured at Aurangabad in Maharashtra. The Aurangabad plant is certified under ISO 9001:2008. MCIL was a joint venture between Cotton Greaves and Morgan group. However, in 2006 it was acquired by Morgan group. In the same year Morganite had made investment in Diamond Crucible company Limited (DCCL) of Rs  4.96 crore for 51% and,  in July 2017 had acquired the remaining stake for Rs 16 crore.

The transaction is to consolidate entities under same control however there is no immediate gain for minority shareholders.

DIAMOND CRUCIBLE COMPANY LIMITED (DCCL) is primarily engaged in manufacture and sale of crucibles and allied refractory products for industrial use having its manufacturing facility at Mehsana in Gujarat. DCCL is currently WoS of the MCIL. DCCL was incorporated on June 23, 1981. The company’s sales are mostly generated from dealers and from few direct customers and primarily services the automobiles industry in India.

TRANSACTION:

Merger of DCCL into MCIL with appointed date October 1, 2017 since it is WoS merger there is no consideration.

Morganite-Crucible-Diamond-Crucible-Merger-1

RATIONALE:

  • Both the companies are engaged in the same line of business and share common corporate values and culture.
  • Simplify the corporate structure and eliminate duplicate corporate procedures.
  • Achieve economy of scales, reduction in overheads

SHAREHOLDING:

Morganite-Crucible-Diamond-Crucible-Merger-2

Since it is WoS merger there is no consideration, therefore, there is no change in shareholding of the company post-merger.

BEFORE THE MERGER

DCCL was subsidiary of the company, however, MCIL acquired remaining stake 49% from Terrassen Holdings Limited in July 2017 for Rs 16.75 crore. The details of investment by MCIL in DCCL is as follows:

Table 1: Investment by MCIL

Investment FY17 FY06
Amount 16,75,00,000 4,96,98,740
No. of Shares 17,150 17,850
Price Per Share (Rs) 9,767 2,784
Stake 49% 51%

Please note that MCIL with Terrassen Holding has done investment in 2006.  Post-acquisition, DCCL entered into an agreement with Morganite Crucible Ltd UK for providing management services in the areas of planning, sales, accounts and HR policies and various other commercial aspects. And also the agreement for use of trademark logo and GBU charges and technical know-how support from the promoters. In 2017 MCIL generate operating cash flow of Rs 21 crore. Therefore, out of its cash surplus it has acquired remaining stake for Rs 16 crore.  Terrassen will be liable to taxation as acquisition of 49% stake was for Rs 4.77 crore and sale value is Rs 16.75 crore.

FINANCIALS:

Table 2: Financials of Diamond Crucible for FY06 and FY17.

Particulars DCCL
FY06 FY17
Net worth 2,01,40,516 17,31,67,130
Turnover 7,64,18,091 26,50,00,773
Net Profit 37,56,091 3,35,83,615
No. of Share 35,000 35,000
EPS 107 960

Since the acquisition by Morgan Group, the company has been able to grow its revenue approx. Four times and whereas net profit 10 times and became debt free company by repaying debt of Rs 2.50 crore. Based on FY17 financials, DCCL was valued at approx. Rs 34 crore ignoring controlling premium. The Details of Valuation is as follows:

Table 3: Valuation of DCCL Current and Past.

Particulars 2006 2017
Valuation including/excluding Control Premium * 9,75,00,000 34,19,00,000
Sale Multiple 1.28 1.29
PE Multiple 25.96 10.18

*Please Note FY06 valuation is including control premium whereas for FY17 it is excluding Control Premium

Table 4: Merger Effect on MCIL Networth

Particulars  Amount
Investment in DCCL 21,71,98,740
Net worth of DCCL as on 31.03.2017 17,31,67,130
Effect on networth of MCIL -4,40,31,610

* Net worth is subject to financial as on Appointed Date October 1, 2017.

Table 5: Financials of MCIL Post-Merger

Particulars MCIL on merger of DCCL Post merger
Net Worth as on 31.03.2017 82,85,33,921 -4,40,31,610 78,45,02,311
Turnover 85,84,34,997 * 23,21,36,046 1,09,05,71,043
Net Profit 13,16,55,939 3,35,83,615 16,10,74,599
No. of Shares 28,00,000 28,00,000
EPS 47.02 59.01
Book Value Per share 295.90 280.18

Please note the figures on merger are after adjusting for related party transaction approx. Net Sale of Rs. 3.28 crore.

Since it is a merger of WoS into its holding company there is no consideration.

MARKET PRICE:

The upward movement in market price post announcement of acquisition and subsequent merger is almost 50%.

Morganite-Crucible-Diamond-Crucible-Merger-3

CONCLUSION:

The acquisition of remaining stake from Terrassen is done from cash surplus which the company is able to generate on year on year and consolidation by merger will simplify the structure for the holding company. Exit given to the promoters’ holding company is at the same sales multiple and PE multiple is around 10 which seems fair for the minority shareholders. However, the management has an option to merge DCCL with MCIL without acquisition of stake from Terrassen and sale shares of listed company to remain compliant of listing regulations of having minimum 25% public shareholding and have lower or nil capital gain tax. The consolidation has resulted into improved EPS which will benefit the company and it generates free cash flow year after year and management wants to look for non-traditional businesses for expansion.

Please feel free to share/retweet the article and as always you can write down in the comment box below for anything related to the article. We would love to answer.
print