Sunday, April 15, 2012

>ZUARI INDUSTRIES LIMITED: Demerger (into Zuari Holdings (ZHL) separates agri businesses from unrelated ones

Zuari Industries (Zuari) has demerged its agri‐related businesses into Zuari Holdings (ZHL). The company will continue to hold 30% in ZHL and the balance will be distributed to existing Zuari share holders in 1:1 ratio, with April 10, 2012, as the record date. Post demerger, we arrive at a target price of INR466/share for ZHL, based on 8x FY13E P/E. On the other hand, we arrive at SOTP value of INR238/share for Zuari, even after assuming 60% holding company discount for the investment book, assuming 50% holding company discount for the 30% stake of Zuari in ZHL and assigning 4x P/E for core earnings on FY13E basis. Maintain ‘BUY’ on Zuari.

 Demerger separates agri businesses from unrelated ones
With the demerger, ZHL holds Zuari’s agri related businesses while the other entities (with business interests in furniture, EPC, investments & financial services, oil tanking and real estate) will continue to remain in Zuari (along with 30% stake in ZHL). Zuari management has guided for ZHL listing over the next 3‐6 months.

 Deep value despite 60% discounting of investment book
Post the demerger, even after assuming 60% holding company discount for the investment book (comprising Chambal Fertilisers, Nagarjuna Fertilisers, Texmaco, Texmaco Rail and Engineering), a 50% holding company discount for the 30% stake of Zuari in the demerged fertiliser business (ZHL) and 4x P/E for the core earnings on FY13E basis, we arrive at SOTP valuation of INR238/share.

 Outlook and valuations: Deep value; maintain ‘BUY’
Zuari management guides that most of the company’s debt will be moved to ZHL’s balance sheet as it pertains to the buyer’s credit on account of the fertiliser business. On the other hand, the investment book will be retained in Zuari. While we await the breakup of profit and loss statement as well as balance sheet for new entities, we continue to present financials for erstwhile Zuari. We believe this demerger will enable
rerating for the fertiliser business and we value ZHL at INR466/share, based on 8x P/E on FY13E basis. On the other hand, we value Zuari at INR238/share based on SOTP. We maintain ‘BUY’.

To read report in detail: ZUARI INDUSTRIES LIMITED