Chambal’s shipping biz demerger ratio fixed at 1:8, promoters hike stake

The board of Chambal Fertilisers and Chemicals approved the demerger of its shipping business to a subsidiary India Steamship. In March 2011, the company had announced its intention to restructure the shipping business and has now formalised the structure.

Chambal has a 100% subsidiary called India Steamship. As a prelude to the demerger, it has decided to invest Rs 338 crore in this company, by the issue of 4.1 crore equity shares worth Rs 328 crore and 1 crore redeemable preference shares worth Rs 10 crore. These are partly-paid up at the moment, and the company has invested only Rs 4.1 crore as equity and Rs 1 crore in its preference capital as of now. Thus, a further capital infusion will be due from Chambal in future.

The Board agreed to the restructuring proposal, the main logic of which appears to be to seek collaboration and expand the shipping business. Nearly half of Chambal’s Rs 5,678 crore consolidated revenues in 2010-11 were contributed by fertilisers and phosphoric acid, 28% by traded goods, 5% by shipping, 6% from textiles, and the remainder from others.
Thus, shipping is a relatively insignificant part of the company’s business. So, what could it hope to achieve by separating the business?

Valuation could be one factor. Chambal’s latest market capitalisation is Rs 3,527 crore, or 62% of its consolidated revenues in 2010-11. Much of that can be attributed to its policy-plagued fertiliser business, which generates very low returns. By demerging the shipping business, Chambal may be hoping that the sum of parts is greater than the whole.

Great Eastern Shipping, for example, trades at about 1.7 times its 2010-11 consolidated revenues. And, this is after it fell by about 30% from its 52-week high reached in November 2010. Notionally, if Chambal’s shipping business were to get the same valuation, it would be trading at about Rs 520 crore, or about 15% of its current market capitalisation. Separating it could see Chambal’s shareholders hold shares with a higher value.

Another factor could be to infuse more capital into the business. Burdened by a debt to equity of 2.2:1, Chambal has little leeway to invest in other businesses. Separating it could allow Chambal to get a strategic investor in the company, or raise funds through a public issue, and fund the shipping business’ expansion plans. Doing that in a company where fertiliser dominates would have been difficult.

Chambal itself will own a significant stake in the company, as this is not a vertical demerger. This is explained a little later. So, Chambal can sell part of its stake in India Steamship and use it to lower its debt, without losing control. Some of the debt will anyway move to India Steamship, the part that is attributable to the shipping business.

India Steamship will issue about 4.1 crore shares to Chambal (its initial share capital prior to this issuance is likely to be negligible). It will issue 1 share for every 8 shares held to Chambal’s shareholders, including the promoters. That will take India Steamship’s equity capital up to Rs 9.3 crore.

Chambal’s promoters –the KK Birla group—will own 31% of India Steamship’s equity capital directly, since they will be issued shares as part of the demerger in exchange for their 55% stake in Chambal. But Chambal also directly owns 4.1 crore shares, giving it a post-demerger shareholding of 44%. In effect, the promoters and Chambal acting in concert, will own a 75% stake in the shipping business.

That gives them flexibility to pare their stake in the company to raise funds for themselves, or to get a strategic investor into the company, without losing control.

The date from which the merger will be given effect to will be April 1 2011, though the legal process and listing of the new company will take time.

Chambal has already set a value to this business, as it is subscribing to India Steamship’s equity capital at Rs 80 a share. On the expanded capital, the market capitalisation based on this price works out to about Rs 740 crore.
But its actual market capitalisation will depend on how robust its shipping business is and its forecasted growth rates. In 2010-11, the shipping division’s revenues rose by 4% and profit rose by 7%. Chambal will have to demonstrate a more inspiring performance, if it wants this demerger to eventually translate into greater shareholder value.

It also released its June quarter results on Tuesday, in which it reported a 35% increase in revenues year on year, and a profit of Rs 1.16 crore compared to a loss of Rs 1.6 crore in the year ago period. The company operates 6 Aframax oil tankers with a combined capacity of 600,000 dead weight tonnes and it also has a subsidiary in Singapore, which charters ships. Large addition to shipping fleets worldwide and the global economic slowdown since 2008 has affected freight rates.

Read the release from Chambal on the demerger here and its June quarter financial results here.

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