The Board of Tata Chemicals (TCL) has passed a resolution to increase its stake in Rallis India, from 9.4% to 45.2%, by buying out the share of the other promoters at not more than Rs850 per share.
This would be regarded as an inter-promoter transfer and, hence, would not qualify for an open offer. The other promoter groups consist of Tata Tea (24.5%), Tata Sons (7.5%), Tata Investment Corp (2.4%) and Ewart Investment (1.3%).
The operations of Rallis, as they stand, would not be impacted in anyway due to this transaction.
However, we believe that this move would be beneficial to Tata Chemicals over the long-term, considering that it has a considerable revenue inflow from the fertilizer business (45% in FY2008 and 56% in FY2009), while Rallis has the largest distribution network in the country, with 40,000 retailers covering 80% of India’s districts.
Over a longer term, we believe that fertilizers and agrochemicals can have the same distribution network, as both products have the same end users (farmers). This would lead to better profitability for Tata Chemicals.
Therefore, we believe that the current transaction can be the precursor to a merger between the two companies.
At Rs737, Rallis is trading at 11.9x and 8.9x its FY2010E and FY2011E earnings.
TCL has not disclosed the final purchase price of the stake, but has limited its upper price-band to Rs850 per share, owing to which the upside in the stock is restricted.
However, this deal will not significantly impact our estimates for the company. We maintain an ACCUMULATE rating on Rallis India, with a target price of Rs796.