Zuari Global: Deep value - rerating could begin soon
Zuari Industries Ltd’s (now Zuari Global Ltd) Board of Directors at a meeting held on 24th May 2011, considered and approved, a Scheme of Arrangement / Demerger with Zuari Holdings Ltd. (ZHL) (now Zuari Agro Chemical Ltd (ZACL)), under the provisions of Section 391 to 394 of the Companies Act, 1956. The appointed date of the arrangement / demerger was 1st July 2011. Upon completion of the arrangement / demerger, shareholders of Zuari Industries Ltd. would receive 1 fully paid equity share of Rs10 each of Zuari Holdings Ltd for every share held by them in Zuari Industries Ltd, on record date to be fixed by Zuari Industries Ltd. The record date for said demerger was fixed at 10th April 2012.
ZACL is in the process of getting listed. ZGL has received approval from the SEBI and has released an information memorandum in the newspaper on 10th November 2012. The stock is expected to start trading from 27th November 2012. The purpose of our note is to take advantage of the discount in valuation of ZGL.
ZGL remains listed in the meanwhile and the share price of ZGL has fallen from Rs183 in April 2012 to the current price (in the interim making a low of Rs112.) One reason for the stock price continuously falling was that its 30% holding in Zuari Agrochem was not getting reflected adequately in the absence of its shares being listed. This could now get rectified once ZACL shares get listed on November 27.
Rationale for Demerger
Zuari Industries Ltd (now ZGL) had grown into a very sizeable organization and had evolved into a well diversified and progressive industrial group. Each business of ZGL was distinct and diverse in characteristics. The rationale for the Scheme of Arrangement and Demerger was to consolidate the fertilizer businesses of the Zuari group under one company. Zuari Global Ltd (ZGL) (previously Zuari Industries Ltd) is now a holding company for the groups various businesses. All fertilizer operations of ZGL have been demerged into Zuari Holdings Ltd (ZHL) (now renamed to Zuari Agro Chemicals Ltd (ZACL)). ZACL’s subsidiaries (Zuari Seeds Ltd and Zuari Fertilizers and Chemicals Ltd) have also been demerged from ZGL. Additionally, Zuari Rotem Specialty Fertilizers (50:50 JV with Rotem Amfert Negev Limited, Israel) and Zuari Maroc Phosphates (50:50 JV with Maroc Phosphore S.A., Morocco) have also been demerged into ZACL. However, ZGL will hold 30% in ZACL, while the remaining 70% will be distributed to shareholders of ZGL in the 1:1 ratio determined previously.
Valuation & Recommendation
HDFC Sec has valued ZGL on a SOTP basis, taking into account the consolidated financials (excluding income from investments) of ZGL, consolidated book value of ZACL and book value of investments and cash. Based on this valuation methodology, HDFC Sec feels ZGL shares could be bought at the CMP for a target of Rs188 in 1-2 quarters.
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