Zuari Industries - High Court approves demerger; company update; Buy :Edelweiss PDF link

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Zuari Industries (ZUAR IN, INR 486, Buy)

Zuari Industries (Zuari) reports that it has received sanction from the High Court of Bombay at Goa for its proposed restructuring of fertiliser and related entities into Zuari Holdings (ZHL) as well as demerger of ZHL. We believe that this would enable value unlocking by Zuari Industries for its fertiliser business, leading to a re-rating. It would also address investor concerns over the possibility of the company investing fertiliser profits into unrelated businesses. Maintain ‘BUY’.

Demerger would separate agri businesses from the unrelated ones

Zuari’s agri related businesses were transferred to Zuari Holdings Limited (ZHL), its 100% subsidiary, with effect from July 1, 2011. Post the demerger, ZHL would contain the following companies while the rest of the entities (with business interests in furniture, EPC, investments and financial services, oil tanking and real estate) would continue to remain in Zuari Industries.

·       Standalone fertiliser business of Zuari

·       Stake in Zuari Maroc Phosphates, a 50:50 JV with Maroc Phosphore (which owns 80% stake in Paradeep Phosphates)

·       Stake in Zuari Rotem Speciality Fertilisers, a 50:50 Joint venture with Rotem Amfert

·       Zuari Seeds, a wholly owned subsidiary

·       Zuari Fertilisers and Chemicals, a wholly owned subsidiary

ZHL would be demerged as a separate entity (and listed on the stock exchanges), in which 30% would be owned by Zuari Industries and the remaining 70% will be distributed to the existing shareholders of Zuari Industries in the ratio of 1:1.

Outlook and valuations: Positive; maintain ‘BUY’

While we believe that a 100% demerger of ZHL (i.e. Zuari Industries not holding any stake in ZHL directly) would be in the best of Zuari shareholders’ interest, nevertheless, the separation of the agri related businesses into new entity is value accretive for shareholders and would enable utilization of fertiliser profits for growth in related businesses. This would also augur well for the proposed capex for setting up a 1mn MT NPK plant as well as a 1mn MT urea plant (subject to favourable urea investment policy). We currently have a ‘BUY’ recommendation on the stock.

Zuari Industries - High Court approves demerger; company update; Buy

Regards,