Deepak Fertilizers plans to restructure its business
In the modern business era where positioning the company can make a big difference to valuations, traditional commodity companies are in a fix. One such major company in India with a strong franchise in fertilizers and chemicals is Deepak Fertilisers and Chemicals Ltd. On 15th December, Deepak Fertilizers and Chemicals announced a detailed plan to restructure its businesses. The idea here is to demerge its mining chemicals and fertiliser businesses into separate units so that there is better value discovery and a better approach to pricing the business. According to the company, this will also facilitate focused leadership to the business; apart from simplifying the structure and adding to the growth potential.
Commodity businesses are simple businesses, but that kind of simplicity also makes it very cyclical. As a result, such pure commodity driven businesses tend to attract much lower valuations which eventually impacts their ability to use stock as currency for organic and inorganic growth. One of the main ideas behind this restructuring is to separate the commodity business from the specialty business. By default, the speciality business can get better valuations due to differentiation and also due to greater value addition. However, when this specialty business is mixed with a commodity business, it results in confused valuations. That is something this restructuring will achieve.
Broadly, at a philosophical level, the restructuring of Deepak Fertilizers will be done in line with the company’s strategic shift. In its last MDA, the board had spoken about the need to gradually move from being a pure commodity to a specialty business. This has also been mentioned by the company when it filed for the demerger with the stock exchange. Capacity for value addition and shareholder value creation is normally a very important criterion for capital allocation. It is believed that the maximum capital allocation should go to businesses that can generate the maximum shareholder value. If a company like Deepak Fertilizers has to enhance value, its capital must be allocated to the value added business.
How will the demerger modus operandi work?
While the final contours of the demerger would be eventually put out by the board, as of now, they have only got the board approval and the regulatory approvals are still pending. For now, the board of directors of Smartchem Technologies Limited (STL), a wholly owned subsidiary of Deepak Fertilisers and Petrochemicals, has in its latest board meeting approved the corporate restructuring plan of its companies. Under the terms of the demerger, the mining chemicals business (TAN) will be transferred from STL to Deepak Mining Services Private Limited, which is a wholly owned subsidiary of Deepak Fertilisers. Also, the restructuring includes the amalgamation of Mahadhan Farm Technologies.
The company and its top management remain extremely positive about the salutary impact that the restructuring will have on the overall value creation for Deepak Fertilizers. According to the chairman of Deepak Fertilizers, the corporate restructuring plan will help to substantially create and catalyse strong independent business platforms, albeit with the larger umbrella of Deepak Fertilizers. This is likely to be value accretive for shareholders in the medium to long run as it brings about a more granular marking of business lines and separates the commodity business from the value added specialty business. The company also expects this to be shareholder value accretive, once the process is fully consummated.
The traditional approach of Deepak Fertilizes had been to focus on the quantum of production, optimization of costs to enhance ROI and in ensuring the best capacity utilisation levels for the business. The whole accent in the past was to improve and enhance efficiency of operations. Now that has changed and restructuring has taken on a more transformative meaning. That is where the company has now come up with a more bottom-up transformative strategy to rethink the business from the base. That shift is reflected in the restructuring plan, which will now create separate and distinct value propositions with commodity business on one side and specialty businesses on the other side.
To sum up the restructuring in the words of the management, it is likely to have 3 main focus areas. The first will be to have a greater accent on customised speciality business rather than the traditional commodity business. The second big shift envisaged is to move from a pure volume focus to an End-User Focus with premium value delivery. Lastly, the rationale of pricing will also shift from the traditional competitive pricing to value driven pricing. The company strongly believes that this shift in strategy may be radical but it is also essential to enhance customer experience and ensure customer delight. In the process, Deepak Fertilizers hopes to build and nurture a sustainable and enduring brand.
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