Win-win deal

Balrampur adds capacity, Dhampur to retire part of debt

Balrampur Chini's acquisition of Dhampur Sugar's Rauzagaon plant in Uttar Pradesh will help it increase its sugar capacity by a decent margin. Since Balrampur has a plant at Haidergarh in the same Barabanki district, it will not have a problem sourcing cane sugar.

On the other hand, two of Dhampur's plants are located in close proximity to each other in northern Uttar Pradesh, and this unit is located at a distance in eastern UP.

The sale will help Dhampur concentrate its operations including cane procurement in the north. For both companies, this deal is a win-win.

Dhampur, which has had a debt problem in the past, will use some amount from the Rs 182 crore sale proceeds to retire a part of its debt. In 2003, it had raised a rights issue to comply with the Corporate Debt Restructuring cell.

It had a total debt of Rs 366 crore in September 2004. With lower debt and a reduction in interest rate, Dhampur's interest cost will fall substantially and make the balance sheet stronger.

For year ended September 2004, Dhampur's sugar production at Rauzagaon was 41.6 per cent lower as compared to a 19.2 decline in its combined capacity.

Utilisation has been better in 2004-05 with 90 lakh quintal of cane crushed against 56 lakh quintal last year.

In 2004, Balrampur had announced that it was interested in acquiring sugar plants, and this unit is the first acquisition since then. Balrampur's previous acquisition was in 1998 when it acquired Tulsipur Sugar. In 1990, it had acquired Babhnan Sugar. Both companies were merged with Balrampur subsequently.

Since 1998, Balrampur has grown organically. Balrampur is also setting up a 7,000 tcd greenfield project and a 4,000 tcd brownfield project, which will be operational by the end of November 2005.

Balrampur had raised around Rs 60 crore by way of a rights issue in 2004 to augment its long-term working capital requirements. It plans to use a combination of internal resources and debt to finance this acquisition.

With a healthy balance sheet, the increase in debt should not be a problem for Balrampur. The company also plans to raise Rs 200 crore by a GDR/FCCB issue.

The stock market gave a thumping approval to Dhampur's sale as the stock price gained more than 10 per cent. Balrampur Chini also gained over 5 per cent.

Matrix preferential offer

Matrix Laboratories, the Rs 640-crore active pharmaceutical ingredients (APIs) and solid oral dosage forms manufacturer, is planning to dilute its equity by about 2.3 per cent via a preferential issue. This preferential issue is at Rs 225 per share and it would help Matrix raise Rs 78.75 crore.

The company's cash flow (net profit plus depreciation) amounted to Rs 66.87 crore at the end of the first half of 2005-06. It is understood that the company would allot shares to the erstwhile promoters of Belgium-based Docpharma NV via this preferential issue. Matrix had taken over this Belgian company in the first quarter of 2005-06.

The overseas investors would be buying the stock at about 26 times estimated 2005-06 earnings. Matrix is expected to use the resources raised for strengthening its working capital and for its capex plans, point out analysts. This development helped the stock gain about 5.7 per cent to Rs 189 on Monday.

Nevertheless, this preferential issue would be at a premium of 19 per cent to the stock's last closing price. At the end of the September quarter, the promoter holding in the company amounted to 65.34 per cent, while that of FIIs were 12.2 per cent.

No doubt prices of the company's key product citalopram, an anti-depressant, have shown signs of improvement, they are still lower on a year-on-year basis.

To offset this weakness, the company is planning to scale up its contract manufacturing business from about 13 per cent of total revenues in 2004-05 to about 35 per cent in the next four years, according to analysts.

Returns in contract manufacturing are typically pegged at between 15-20 per cent.

The company had earlier reported a 31.47 per cent drop in its operating profit to Rs 39.25 crore in the September quarter. However, results of the last quarter are not strictly comparable with the corresponding period of the previous year, as they do not include the amalgamated companies. Nevertheless, the company's operating profit margin fell 1276 basis points to 22.51 per cent in the last quarter.

The company's margins have also been hit by staff costs as a percentage of net sales rising 284 basis points to 7.22 per cent in the September quarter.

Going forward, synergies with the company's recent acquisitions in Europe and China are expected to be the key growth drivers in the medium term.