The Arvind Mafatlal group has finally put to rest all speculations about the split in Nocil. The company will be demerged into three smaller companies, petrochemicals, rubber and the residual comprising plastics and investments. Montell will pick up 49 per cent in the new company through a preferential allotment for a price not less than Rs 29 per share, which is in accordance with the Sebi formula. Nocil's current shareholders will now be holding shares of the two newly formed companies as well as the present firm. After the demerger, the equity will be divided among the three companies--petrochemicals--70 per cent, rubber chemicals--16 per cent and 14 per cent of the equity for the residual company.

Two questions arise. What do the shareholders gain in the process and what is in the deal for the promoters -- the Mafatlals? For the shareholders, they get to hold shares of one of the largest oil companies--Shell--at no extra cost. As management control will be in the hands of Shell,discounting of this company will definitely be better.

With Shell likely to set up a refinery in the country, raw-material sourcing (mainly naphtha) will not be a problem. Further, the company will be going in for expansion with a world- scale naphtha cracker with an initial capacity of 4,50,000 tonnes per annum, which can be later expanded to 6,00,000 tonnes per annum. The complex will have a 100mw captive power plant. Thus the economies of scales and low input costs will be major boosts to the company's dwindling profits.

The most important point here is that with more international players setting up shop in India, an aggressive and professional management is required at the helm. Further, the petrochemical venture will have access to the latest international technologies and the much-needed funds.

Montell is also considering an evaluation of higher realisation solvents, alcohols, ethylene oxides and glycols business. As the management agrees that the current size of operations is small and there isa need to improve competitiveness, better profitability from these divisions is very likely.

As for the rubber-chemicals division, the company has a turnover of around Rs 170 crore, which is the largest in the country. The rubber-chemicals business in the country is going through a bad phase with prices declining owing to higher imports of rubber and its declining consumption. Though Nocil has managed to increase volume sales, its realisation has been lower during 1997-98. This division operated at 81 per cent capacity utilisation in 1997-98, against 85 per cent in the previous year on account of capacity build-up.

In all probability, Nocil will sell the division (Apollo Tyres tops the list of likely buyers). Shareholders will, thus, have an exit option when the Mafatlals sell the division, when an open offer will be announced.

The residual company is like the name suggests--residue, with very little value. The division will hold the plastics divisions and investments of Nocil. The most attractivefeature of the company will be its holding in De-Nocil, an agro chemicals-based company. Growth of De-Nocil is good. However, revenue to Nocil is only in the form of a dividend and is not yet forthcoming.

The company has an investment portfolio of Rs 133.05 crore, which consists of Rs 31.09 crore of quoted securities, the value of which has dropped to Rs 13.67 crore as on March 31, 1998. Income from long-term investments in 1997-98 was Rs 2.19 crore, against Rs 4.28 crore in the previous year. The company earned a profit on sale of long-term investments to the tune of Rs 10.11 crore.

The company's plastics-products division posted sales of Rs 62 crore in 1997-98. The company's drip-irrigation system increased three-fold during the year, while the sprinkler systems' sales were lower by 50 per cent. The division has seen additional capacity being set up in blow moulding for manufacture of L-ring drums and large-capacity containers.

The plastic-products division is a high-volume low-realisation business.With the funds situation likely to be dearer after the demerger, the growth of the company will be at best mediocre. With an equity of around Rs 17 crore. there is little scope of earning decent returns.

But what is in it for the promoters? As far as the petrochemicals business is concerned, they have little scope for cash flows in the near future. However, if market rumors are to be believed, the Mafatlals, who will be holding 21.5 per cent of the shares after Shell brings in its portion of equity, are likely to dilute it further by 10 per cent. As the transfer will be between two promoters, it will not trigger the takeover code and the Mafatlals can earn a decent profit from the sale. Even if the sale does not take place, the value of their investments will be higher than the present levels.

The sale of rubber chemicals will fetch the company the much-needed cash to focus on its core business of textiles, while the residual business can be termed as a shell company for holding a stake in De-Nocil, whichcould be a good performer in the long run.

To put it in a nutshell, the petrochemicals company is worth holding on to. While the best price for the rubber-chemicals company will be possible at the time of an open offer, and the residual company has little to offer the shareholders.

Emcee (With contributions from Shishir Asthana)