Zuari Inds: proposed merger of Gobind Sugar & 1:1 share allotment will dilute earnings, value

KK BIRLA Group firm Zuari Industries has outperformed the market by a wide margin over the past one year. The scrip gained 397% in the past one year compared to the 184% jump in the benchmark Sensex.
This follows the overall buoyancy in the fertiliser sector since the first signs of deregulation since July 2008. The company has recently decided to merge its group company and Gobind Sugar Mills listed on the Kolkata Stock Exchange by issuing Zuari’s shares on a 1:1 ratio.
This will entail an issue of 32-lakh equity shares, which implies a dilution of 10.9%, taking ZIL’s outstanding equity to Rs 32.64 crore. Considering, the EPS of Gobind Sugar Mills’ for the year ended June ‘09 at Rs 24.7 against Rs 120.4 of ZIL, this amalgamation will bring down the EPS.
With low debt and a cash rich status, ZIL is increasing investments in its subsidiaries. Recently, the company created two subsidiaries — Globex and Zuari Fertilisers & Chemicals — for facilitating further investment-led growth. Based out of Dubai, Globex will carry on the commodities trading business, while ZFCL will manufacture fertilisers.
Similarly, ZIL plans to develop 73 acres of land near Mysore obtained way back in 2007 through acquisition of a real estate company. The company also subscribed to 62.4-lakh shares of Zuari Investments making it a subsidiary. The company already has interests in pesticides, furniture and financial and engineering services through its subsidiaries.
Zuari’s urea plant in Goa is yet to receive natural gas and is currently operating on liquid fuels. With Gail extending its pipeline till Dabhol on the western coast and planning to take it down till Bangalore, ZIL hopes to get gas by 2013. The company has already signed gas supply agreement with GAIL (India) for supply of RLNG. Simultaneously, the company has obtained government approval to revamp its plants to use gas instead of naphtha. The process will also increase the capacity of its 4-lakh tonne per annum urea plant, thanks to debottlenecking.
The government has recently approved nutrient-based subsidy policy with effect from April 1, 2010 and increased urea prices by 10%. These developments stand to benefit Zuari in the long run. Although there are multiple positives about the stock, the proposed merger of Gobind Sugar and the 1:1 share allotment will dilute earnings and value to the detriment of minority shareholders.