ZUARI INDUSTRIES (ZIL), the flagship company of KK Birla group appears grossly undervalued at its current market price. Besides being one of India’s leading fertiliser makers on a standalone basis, the company is also a promoter of Chambal Fertilisers and indirectly holds over 40% stake in Paradeep Phosphates, the country’s secondlargest manufacturer of phosphatic fertilisers. Besides, it has over half a dozen subsidiaries and joint ventures (JVs), most of which are doing well.
However, ZIL’s current market capitalisation (m-cap) doesn’t reflect the embedded value of these other assets. Considering the value of its investments and land bank, we estimate the embedded value of this company to be Rs 2,750 crore, against its current m-cap of just around Rs 930 crore. This makes ZIL an ideal stock for those who prefer value investing. BUSINESS:ZIL currently produces over 1.15 million tonnes per annum of nitrogenous, phosphatic and complex fertilisers at its plants in Goa. Besides these, the company trades in MOP, agrochemicals, biofertilisers and other specialty fertilisers. It has also set up a number of subsidiaries and JVs around its core business. The company currently uses naphtha at its urea plant and plans to convert this to natural gas feedstock by ’09 as per government policy. ZIL is currently in talks with Gail, which may extend its natural gas pipeline from Dabhol to Zuari’s fertiliser plants in Goa.
GROWTH DRIVERS:
Although subject to subsidies, the company’s core business of fertilisers is now profitable and growing steadily. The future outlook of the fertiliser industry seems encouraging. With rising domestic demand for fertilisers, the government has to allow more concessions to the industry, so as to encourage investments and capacity expansions.
The three group companies — Chambal Fertilisers, Paradeep Phosphate and ZIL — have a combined fertiliser production capacity of around four million tonnes. This makes the Zuari group India’s largest fertiliser group with three strategically located plants in west, east and central India. It also gives the Zuari group access to almost 80% of India’s cultivable area and puts it in an advantageous position compared to its peers.
FINANCIALS:The company was making losses till ’04-05 and has turned around subsequently. During FY06, it posted a net profit of Rs 44.4 crore on a consolidated basis, which jumped to Rs 420.9 crore in FY07. This included an extraordinary gain of Rs 350 crore on sale of its stake in its cement JV. The company registered a minor 8.5% growth in net profit to Rs 44 crore during the first half of FY08 against the corresponding period last year, excluding the impact of extraordinary income. Sales during this period fell 4% to Rs 1,235 crore.
VALUATIONS: The company’s core business generated net sales of around Rs 2,400 crore in FY07 and PAT of Rs 90 crore. At the industry P/E of 12, this should be valued at around Rs 1,000 crore, which in itself, is higher than its current mcap. Apart from its core business, ZIL also has a number of investments in subsidiaries and JVs, which are coming of age. The company has two wholly-owned subsidiaries, Indian Furniture Products and Simon India, while it owns 93.5% stake in Zuari Seeds. All these companies have established set-ups and have turned around. Zuari’s stake in all these subsidiaries is worth around Rs 100 crore.
The company also has three JVs — Zuari Maroc Phosphate (50% stake) that owns over 80% in Paradeep Phosphates, Zuari India Oiltanking (50% stake) and Zuari Investments (50% stake). Paradeep Phosphates posted a net profit of Rs 110 crore in FY07. At the industry P/E of 12, this company can be valued at Rs 1,320 crore. ZIL also has investments in some listed companies, such as Chambal Fertilisers (12.9% equity stake). The current market value of these quoted investments is around Rs 350 crore.
Moreover, the company owns land bank in excess of 50 acres in Goa, where it is planning to set up an IT special economic zone (SEZ). The value of this land bank is estimated at around Rs 700 crore. All these put together, ZIL’s current business is actually worth Rs 2,750 crore, which is substantially higher than its current m-cap. This provides an excellent opportunity for long-term investors to benefit from valueunlocking over a period of time.
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