Stock Review: COROMANDEL INTERNATIONAL

Coromandel International acquired agrochemicals firm Sabero Organics to grow nonsubsidy operations, including pesticide business in India and overseas. However, the synergy will only have limited benefits for Coromandel as agrochemicals business contributes just 6-7% to its overall revenue.

In March, Coromandel, part of the $3.8-billion Murugappa Group, acquired 14.29 million shares (42.2% stake) of Gujarat-based Sabero Organics at . 160 per share. Coromandel will make an open offer to purchase an additional 31% stake in Sabero from the market at the same price. The buy-out price is at high premium of 35% to the stock's current trading price and the company is valued at an EV/EBIDTA of 15. However, currently the company is trading at an EV/EBIDTA multiple of 12.2.

Reacting to the news, while Sabero's scrip gained over 20% during the last three trading sessions, Coromandel's stock fell 0.6%. The huge variance in the stocks performance can be attributed to high valuations attracted by the former and limited synergy benefits for the latter.

Sabero is a generic agrochemicals player producing crop protection chemicals and specialty chemicals. Also, with over 240 registrations in more than 50 countries, exports account for nearly 60% of the company's overall revenues.

Although, the acquisition will drive synergy benefits for the fertilisers player by strengthening position in $40 billion global market of crop protection products, it will not be a major addition to the company's bottom-line. Agrochemicals business contributes only 6-7% to the company's overall revenues and 15% to its bottomline.

In FY11, Coromandel posted a turnover of . 7, 527 crore, of which about . 500 crore was from crop protection products. During the same period, Sabero posted total revenue of . 413 crore and a net profit of . 17 crore.

With an installed capacity of 60,000 tonnes, Sabero is operating at only 30-40% of its permissible capacity.

Coromandel expects to leverage on its network and marketing capability and improve capacity utilisation benefitting the combined entity in the coming quarters. Also, given the potential in the agrochemicals business, Coromandel expects to drive strong growth from the segment.