Shares of Hindustan Lever Chemicals and Tata Chemicals declined last week after the announcement of the share swap ratio for the merger of the former with the latter.
Rallying sharply following the announcement of the merger on 22 January 2003, HLCL staged a reversal on 24 January 2003 as the scrip tanked to adjust to the merger ratio.
The scrip had surged by 10% to Rs 187 on the BSE on 22 January 2003 following the announcement of the merger. It fell to Rs 182 in the next session. On 24 January 2003, it plunged by 9.9% to Rs 163.85 following the announcement of the merger ratio at 5:2 (5 shares of TCL for every 2 shares of HLCL).
TCL, which also rose sharply on 22 January 2003 following the merger announcement, pared most of its gains in the next two sessions. The scrip jumped by 9.8% on Wednesday (22 January 2003) to Rs 66.60 from its close of Rs 60.65 on 21 January 2003. In the next session, it fell to Rs 63.25 on 23 January 2003. After the announcement of the merger ratio, the scrip slipped further to Rs 61.30 on Friday (24 January 2003).
The TCL scrip was on a recovery mode on the bourses of late. From a low of Rs 34.15 on 17 September 2001, it had surged to a high of Rs 69.35 on 8 July 2002. The scrip later witnessed a sustained fall to reach a low of Rs 46.90 on 14 November 2002. From that low, the scrip once again moved up to reach a high of Rs 66.60 on 22 January 2003, when the merger was first announced.
The merged entity (HLCL with TCL) would have an annual turnover of about Rs 2,500 crore (Rs 25 billion) and net profit of about Rs 165 crore (Rs 1.65 crore) . (This is based on the FY 2002 financials of TCL and HLCL wherein the financials of HLCL comprised 15 months - annualised).
As per the ratio of merger worked out by the valuers, 5 TCL shares will be allotted for every 2 equity shares of HLCL. HLCL has a low equity base of Rs 13.79 crore while TCL has a high equity base of Rs 180.72 crore (Rs 1.8 billion). The merger would lead to a substantial dilution of equity by about Rs 34 crore. The post-merger expanded equity of TCL would be about Rs 215 crore (Rs 2.15 billion), from the current Rs 180.72 crore (Rs 1.8 billion).
Hindustan Lever has 50% equity stake in HLCL. Tatas have a 29.85% stake in TCL, which is held jointly by Tata Sons (with a 10.1% stake), Tata Investment Corp (9.9%) and Tata Tea (8.5%).
HLL would hold about 7.9% stake in the merged entity, while the Tata group's holding in the merged entity would go down from the current 29.85% to about 25%.
It's a marriage of two bigwigs with both the companies having annual turnover in excess of Rs 1,000 crore (Rs 10 billion). Both are leading players in the fertiliser business. The merger of HLCL with TCL would mark TCL's (the merged entity) entry into the phosphatic fertiliser segment. At present, TCL is a leading urea maker (urea is a nitrogenous fertiliser) and it has no presence in phosphatic fertilisers. On the other hand, HLCL is present only in the nitrogenous fertiliser business and a leading player in the industry. HLCL make diammonium phosphate and SSP, both of which are nitrogenous fertilisers.
HLCL markets it's DAP under the brand name Paras, which has a very strong brand equity. The Paras-branded fertiliser is the market leader in West Bengal, Bihar and Orissa. With the merger, both companies can draw on each other's strengths to gain the maximum value in the market place. TCL will be in a position to use HLCL's strong marketing and distribution network to sell its products in the eastern part of India, whereas HLCL can use TCL's strengths for selling its products in western UP and northern India, where it has a strong presence.
In FY 2002 (15 months period ended March 2002), HLCL clocked revenues of Rs 1,129.95 crore from the fertiliser business, which accounted for 87% of its total revenue of Rs 1,305.33 crore. The balance 13% of the revenues, or Rs 175.38 crore, stemmed from bulk chemicals business that includes STTP chemicals.
In FY 2002, TCL derived revenues of Rs 639.29 crore from fertilisers, which accounted for 45% of its total revenues of Rs 1,434.19 crore. Inorganic chemicals business contributed revenues of Rs 794.96 crore to TCL in FY 2002, accounting for 55%.
TCL is one of the most efficient producers of urea. Its fertiliser complex is the pioneer in using dual feedstock facility: natural gas or naptha or both for manufacturing urea in the country. This provides a safeguard against raw material price fluctuations.
HLCL is setting up two significant infrastructural projects for its captive use. One is a captive power plant and the other is an ammonia handling terminal. The capital power plant would reduce the power cost, which would improve the profitability of the fertiliser division.
TCL and HLCL are also into chemicals that are detergent intermediates. HLCL manufactures sodium trio polyphosphate, which is a key ingredient in the production of detergent and it is a leading supplier of STTP to HLL, which has a 50% stake in HLCL.
TCL, on the other hand, is a leading manufacture of soda ash, which also goes into manufacture of detergents. However, TCL supplies soda ash to a host of other user industries like glass making, chemicals and silicates. TCL is a leading player in the soda ash segment, with an installed capacity of 8,75,000 tonnes per annum of soda ash, which accounts for 42% of India's soda ash capacity. TCL manufactures several variants of soda ash such as soda ash light, medium dense, dense, granular and soda ash fused.
The company has a nationwide distribution network, mainly concentrated in the northern and western part of the country, which account for the highest consumption of soda ash. The soda ash industry is growing by 5-6% in the last three years, led by an increase in consumption of detergent and glass manufacturers. Glass, especially that used for construction purposes, is expected to significantly enhance the demand for soda ash.
BSE Code: 506737, 500770