In May 2011, Coromandel International Ltd (CIL) acquired 74% stake in Sabero Organics Gujarat Limited (SOGL) for Rs 452 crore. This includes acquisition of entire 42.2% stake held by promoters in SOGL

Break-up of 74% stake acquired:

  1. Purchase of 1,42,98,112 shares from SOGL ‘s promoters at 160.0 per share for Rs 229 crore
  2. Payment of non-compete to SOGL’s promoters at 38.4 per share for Rs 55 crore
  3. Acquired additional 31% stake through open offer at 160.0 per share for Rs 168 crore

The deal valued the company at Rs 672 crore, 14.3 times EBITDA and 51 times PAT for FY11. Coromandel paid 63.4% premium over May 31, 2011, closing price of Sabero shares, which rose to a record of Rs 97.90 on the BSE after the announcement of the deal.

In January 2014, CIL announced a merger of its subsidiary SOGL with the parent. In fact, 53,09,210 equity shares of Rs 1 each fully paid-up were allotted to the shareholders of erstwhile SOGL in the proportion of five equity shares of Rs 1  each in the company for every eight equity shares of Rs 10 each held in Sabero pursuant to the Scheme of Amalgamation between SOGL & CIL. Merger consideration paid by CIL amounts to Rs 123 crore.

REASONS FOR SOGL’s ACQUISITION AT HUGE PREMIUM

The acquisition was in line with CIL’s strategy to de-risks its business by building a portfolio of subsidy and non-subsidy businesses.

Benefits to CIL :

  • Acquisition catapults CIL into one of the top five players in the country’s Rs 8,000-crore pesticides market
  • Gain ready access to SOGL’s licences. SOGL has marketing licences for about 50 countries
  • Product profile of both the companies complements each other
  • Combined entity will have unmatched range of 16 technical grade pesticides catering to diverse needs of Indian and international customers
  • Access to overseas market as SOGLhas four subsidiaries situated in Brazil, Argentina, Australia and Europe, which will help CRIN to increase its global footprint

Benefits to SOGL :

  • CIL to ramp up capacity utilization of SOGL’s plant in Gujrat & facilitate growth in its business
  • SOGL to benefit from CIL’s strong marketing network

CROP PROTECTION INDUSTRY OVERVIEW

The Indian crop protection industry was around $ 4.25 bn in 2013-14 and is expected to grow at 12% CAGR to reach $ 7.5bn by 2018-19. Exports currently constitute almost 50% of Indian crop protection industry and are expected to grow at 16% CAGR to reach $ 4.2 bn by 2018-19. Domestic market, on the other hand, would grow at 8% CAGR, as it is predominantly monsoon dependent to reach $ 3.3 bn by 2018-19

TURNAROUND OF SOGL’s BUSINESS

SOGL has its manufacturing operations in Gujrat. However, prior to its acquisition the company was unable to scale up its business due to its limited marketing & distribution network. Added to this, there were production restrictions imposed by Gujrat High Court at the company’s Sarigam plant due to pollution – related issues. As a result, SOGL was operating only at 40% capacity & suffered huge losses in FY12.

Post its acquisition, CIL enhanced plant operations at Sarigam & improved operations with SOGL turning in EBIDTA of Rs 51 crore in FY13 as against a loss of (Rs 34.36) crore in FY12.

Operational Initiatives undertaken by CIL during FY13-15:

  • Set up effluent treatment plant (ETP) at Sarigam & implemented Environment Management System (EMS) to enhance production
  • Ensured strict adherence to effluent treatment plant (ETP) and environment management system (EMS) norms, resulting in relaxation of the restrictions imposed on SOGL
  • Enhanced capacity utilization at Sarigam plant to 75% in FY15 from 40% in FY12
  • CIL could leverage on its network to scale-up technicals being manufactured by SOGL
  • Gas prices at Sarigam plant reduced substantially in last three years

SOGL – Financial Performance

Income statement – Sabero Organics Gujrat Limited (SOGL)
Particulars FY15 FY14 FY13 FY12 FY11 CAGR % (FY 11- 15)
Revenue 980 724 516 358 411 24.3%
YoY growth (%) 40.37% 44.07% -12.85%
EBITDA 106 78 51 -34 40 27.6%
>EBITDA Margin (%) 10.8% 10.8% 9.8% -9.6% 9.7%
Depreciation 18 14 11 11 9
EBIT 88 65 39 -45 31 29.2%
EBIT Margin (%) 8.9% 8.9% 7.6% -12.7% 7.6%
Interest expense 41 30 30 28 16
Other Income 1 1 1 3 3
PBT 48 36 10 -70 18 27.5%
PBT Margin (%) 4.9% 4.9% 2.0% -19.7% 4.4%
PAT 45 33 8 -64 11 42.0%
PAT Margin (%) 4.6% 4.6% 1.5% -17.8% 2.7%
All figures in INR Crores Source: Money Control

Note : FY15 Financial details for Sabero not available hence taken on proportionate basis based on FY14 Figures

GAIN / (LOSS) TO MINORITY SHAREHOLDERS OF SOGL

Gain / Loss to SOGL’sMinortity Shareholders on not accepting open Offer Value % Gain / Loss
Market Price per share of SOGL prior as on 24.1.2014 127
Shares held by Minority shareholders of SOGL as on Dec 2013 84,94,736
(A) Value of Minority shareholders prior to Merger 10788,31,472
Shares of CILissued on Merger 53,09,210
Market Price per share of CIL as on 24.1.2014 243.95
(B) Merger consideration piadto Minority shareholders of SOGL 12951,81,780
( C ) Dividend paid to Minority shareholders 238,91,445
Current Market Price of CIL as on 13.4.2016 219.6
Shares of CILissued on Merger 53,09,210
( D) Current value of shares held by Public 11659,02,516
Gain / Loss to Minority shareholders of SOGL on Merger (A-B) 2163,50,308 20.1%
Unrealized Gain / (Loss) to Minorty shareholders post Merger(D-B) -1292,79,264 -10.0%
Gain / Loss to SOGL’sMinortity Shareholders on accepting open Offer % Gain / Loss
Open offer Price per share 160
Shared held by Minorty shareholders 84,94,736
Value 13591,57,760 26.0%

Note : Merger announcement date taken as Jan 27, 2014 for the  above Analysis

CIL – FINANCIAL PERFORMANCE

Income statement – Coromandel International Limited
Particulars FY12 FY13 FY14 FY15 FY12-FY15 CAGR%
Net Sales 5,042 5,998 6,479 8,061 16.9%
Govt Subsidies 4,746 2,971 2,859 3,165
Other Operating Revenue 112 63 42 58
Revenue from Operations 9,900 9,032 9,380 11,284
Other Income 78 70 62 56
Total Revenue 9,978 9,102 9,442 11,340
Net Sales YoY Growth (%) -8.8% 3.7% 20.1%
>EBIDTA 1,132 837 798 908 -7.1%
EBITDA Margin (%) 11.3% 9.2% 8.5% 8.0%
YoY Growth (%) -26.1% -4.7% 13.8%
Depreciation & Amort. 60 71 82 103
EBIT 1,073 766 716 805 -9.1%
EBIT Margin (%) 10.8% 8.4% 7.6% 7.1%
Finance cost 126 210 211 209
YoY Growth (%) 66.7% 0.5% -0.8%
PBT 947 556 505 597
Provision for Tax 276 123 149 189
Profit After Tax 638 433 356 407.8 -13.9%
PAT Margin (%) 6.4% 4.8% 3.8% 3.6%
Financial Year ended March (Figures in INR Cr)(Source: CIL Annual Reports)

CIL’s REVENUE BREAKDOWN

CIL Revenue Breakdown
Revenue from Operations FY12 FY13 FY14 FY15
Subsidy Business (Phosphetic Fertilizer) 90% 90% 80% 82%
Non Subsidy Business 10% 10% 20% 18%

OPERATING HIGHLIGHTS

  • Acquisition of SOGL allowed CIL to increase scale and size of its crop protection business. Combined sales increased to Rs 1450 crore in FY15 as against Rs 912 crore in FY11 resulting in 12% CAGR growth over the last five
  • CIL has focussed on high margin specialities and scaled up formulation sales based on captive technicals including additional range being manufactured by SOGL.
  • CIL expanded its global footprint in agrochemicals across Latin America, Asia, Africa & South East Asia by Leveraging registration portfolio of SOGL
  • Exports for crop protection business contributed 45% in FY15as against less than 10% in FY11 mainly due to SOGL’s acquisition
  • FY12 was a challenging year for CIL as the Supreme Court banned its key product endosulfan (10% of sales). However, launch of other captive products by SOGL helped CIL mitigate the loss from ban of Endosulfan

FINANCIAL HIGHLIGHTS

  • Revenue from NonSubsidy business contributes 18% of CIL’s sales (FY15). Out of which 13% is contributed from combined crop protection business of CIL & SOGL
  • Non-Subsidy EBITDA share at CIL has improved from 23% in FY09 to 34% in H1 FY16. This is mainly due to CILexpanding portfolio of high margin formulation product with Sabero
  • EBITDA contributions form non-subsidy business likely to increase to 45% during FY16-18 leading to strong improvement in CIL’s return on a capital profile.

CONCLUSION

Despite multiple challenges such as resource scarcity, raw material limitations, demand contraction and handling unforeseen natural calamity over the last few years, CIL has evolved into a broader agri-input player in the market and has successfully managed to turn around Sabero’s business by leveraging its marketing network and implementing result oriented growth strategies. Sales & profitability at Sabero has seen CAGR growth of 24% & 42%, respectively over the last five years.  Also, CIL has managed to grow its non-subsidized business contributing 18% of revenue in FY15 as against only 10% in FY12.

However, at a consolidated level, CIL has failed to generate any value to its shareholders. The declining financial performance at CIL over the last four years does not justify the significantly higher price paid by CIL for SOGL’s acquisition. In the hindsight, one can say that it is only the promoters of Sabero who benefit out of the deal as they exited at a huge premium. If merger option would have been chosen instead of stake sale by SOGL’s promoters, then the value received on the merger would have been lesser than the value received on stake sale by Rs 65 crore, based on the Merger terms. Also, the current unrealized loss in Value post-Merger for SOGL’s Promoters would have been Rs (22 crores). Even the minority shareholders of SOGL failed to see any value creation as the current unrealized loss in Value to SOGL’s Minority shareholder post-Merger is Rs (13 CR). Had the minority shareholders accepted the open offer, they would have made 25% Gain on exit then.

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