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Coromandel International has bought a 56.28 per cent stake in listed company Liberty Phosphate. It has also made an open offer to acquire an additional 26 per cent.
However, after the announcement of the deal and the quarterly results, the share price of Coromandel fell about seven per cent in morning trade. "I think the fall in the share price is due to the poor results. However, the acquisition is excellent and valuation at which the company has bought is reasonable," says S P Tulsian, financial advisor.
Considering the valuations and the synergies, the deal should be positive for Coromandel. At Rs 241 a share, the value of Coromandel's stake comes to Rs 196 crore and the value of Liberty Phosphate works out to Rs 348 crore, against its current market capitalisation of Rs 308 crore. This is also why the share price of Liberty went up in the morning trade by 3.4 per cent.
Importantly, Coromandel has also made an open offer for a further 26 per cent at Rs 241 a share. At the said price, Liberty is valued at 0.7 times its FY12 sales and 3.6 times its operating profit, considered reasonable.
However, on the basis of the book value to market cap, the valuation works out to 2.4 times.
That probably captures the low debt in the books of Liberty Phosphate and positive cash flows. Its debt to equity is 0.01 per cent and it has been generating free cash flows in the past five years.
Even the return ratios are impressive. The return on equity in FY12 was 47.4 per cent and return on capital employed was 49 per cent.
These are far better than Coromandel's respective figures, of 23.1 and 29 per cent in FY12. This means the acquisition will in fact add to the existing return ratios of Coromandel.
As Coromandel has cash and cash equivalent of about Rs 1,000 crore, there is enough room to fund the acquisition.