The stock of Mangalore Chemicals and Fertilisers, or MCFL, which has more than doubled in the past three months, was locked at at 10% upper circuit on Wednesday at . 61.7 after the Karnataka-based company emerged as a target for a takeover. The prospect of a bidding war for MCFL increased when Pune-based Deepak Fertilisers took a 24.5% stake last week in the company that produces urea and phosphatic fertilisers, after Zuari Global acquired a 10 % stake. MCFL has long been a comparatively inefficient player in the fertiliser industry with low operating margins, says Sunil Jain, head of equity research at Nirmal Bang Securities. According to him, it will be a little while before the company converts to natural gas. It is also weighed down by huge outstanding subsidy claims. At the end of FY13, the company had a debt of close to . 1,200 crore on its books, almost 85% of which was towards working capital to fund . 1,070 crore of delayed subsidy receipts. However, MCFL’s key location and the projected shift to natural gas appear to have piqued Deepak Fertilisers’ interest in the company. The decision could have been influenced by MCFL plant’s proximity to the New Mangalore port, from where all the important inputs can be imported, says Rajen Shah, Chief Investment Officer, Angel Broking MCFL is working on a feedstock conversion project that will enable it to use natural gas in place of the costly naphtha. The project is scheduled for completion by early 2014. The company plans to source regassified LNG from Petronet LNG’s Kochi terminal and has entered into supply and transportation agreements with Indian Oil and Gail India. This will lower costs considerably, thereby reducing its subsidy burden and financing costs. In FY12, the company had spent . 775 crore, or 21% of its revenues, on naphtha, while interest costs accounted for over one-third of its operating profit. Investors may benefit if they stay on as the prospects are likely to improve for the company if there is a new owner on board.
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