ICRA has assigned AA and A1+ ratings outstanding against Rs 26.87 billion non-convertible debenture programme, commercial paper programme and bank lines of Deepak Fertilisers & Petrochemicals Corporation (DFPCL) on watch with developing implications.

The rating watch follows the open offer made by SCM Soilfert (SCMSL) a 100% subsidiary of DFPCL together with DFPCL for purchase of up to an additional 26% stake in Mangalore Chemicals and Fertilizers (MCFL) from the public shareholders of the latter. The open offer was triggered by the proposal to purchase two million shares of MCFL by SCMSL at a price of Rs 126 million. If the company is able to acquire the proposed 26% stake, the cash outlay would be significant at around Rs 1.9 billion and increase its stake in MCFL to 52% as SCMSL had already acquired 24.46% stake in MCFL in July 2013 at a consideration of Rs 1.82 billion, which was funded through loans from DFPCL. MCFL is a part of the Bengaluru-based UB Group and has capacity to manufacture 3,79,500 MT Urea, 2,17,800 metric tonnes (MT) Ammonia, 2,55,500 MT Phosphatic Fertilizers, 15,330 MT Ammonium Bi-Carbonate (ABC) and 33,000 MT Sulphuric Acid (SAP) annually. 

Given that the financial flexibility of the company was to some extent impacted by the cash outflow for the stake acquisition earlier in July 2013 as well as in light of the proposed debt-funded capex plans of the company, the incremental cash outflow would lead to an increase in the debt levels of the company and impact the financial flexibility of DFPCL. Nevertheless, acquisition of a majority stake in MCFL would be synergistic to the existing fertilizer operations of DFPCL and help expand its marketing reach to southern India, although substantial returns from any such acquisition may likely be realized only in the medium term. Given that the financial implications of the proposed share acquisition are unclear at this juncture pending clarity on the company’s future plans in relation to the acquisition, ICRA will finalize its rating action once further details relating to the transaction are made available by the company. 

Shares of the company gained Rs 0.95, or 0.75%, to settle at Rs 128.35. The total volume of shares traded was 34,149 at the BSE (Monday).