Pune pigments firm gets insolvent German rival for a steal. But at what cost?

Sudarshan will now be No. 2 in the global pigments market, behind Japan’s DIC Corporation, according to the company.

For €127.5 million ( ₹1,172 crore), the Pune-based firm will get access to the assets of the over 200-year-old German company, which include 17 manufacturing sites in 11 countries, including four in India, according to Rajesh Rathi, managing director at Sudarshan Chemical Industries.

It will also be able to access Heubach’s wide customer base in Europe and North America—geographies Sudarshan began expanding into in 2006, a half century after it was established.

“It’s a good valuation. With this, we will be much deeper into Europe and America. They are very strong in coatings; we are strong in plastics. So we will create a very good synergy," Rathi told Mint.

Sudarshan’s shares surged over 19% on Friday to end at ₹1,207.5 apiece on BSE. The stock has more than doubled investor wealth since the beginning of this year, particularly after Heubach filed for bankruptcy in April.

Analysts, however, caution against rushing to buy the stock before reading the fine print of the deal.

“Everything sounds cheap in the Indian context," said one analyst, who declined to be named as he is not authorised by his company to speak with the media. “But the business needs to be turned around. Heubach itself failed to turn around the business after buying Clariant."

Heubach’s downfall

Heubach, along with private equity firm SK Capital Partners, bought the pigments division of Swiss speciality chemicals maker Clariant AG in a deal valued at $900 million ( ₹7,567 crore) in 2021. Back then, Clariant Pigments had about $1 billion in annual sales, four times Heubach’s $250 million revenue, as per German media reports.

An over-leveraged Heubach couldn’t digest the acquisition. The transaction was completed in January 2022. But a month later Russia invaded Ukraine, and ensuing headwinds stalled Heubach’s engines.

“Due to the war, demand went down while energy prices went up. They were affected more because their balance sheet was not healthy," Rathi told Mint. “The company was bearing high interest costs due to the debt taken for the acquisition."

The German company also couldn’t integrate operations fast enough, he said.

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Sudarshan’s giant task

Sudarshan’s Heubach acquisition harks back to the 2020 acquisition of the Pfaudler Group by its Indian subsidiary GMM Pfaudler. The glass-lined equipment maker for pharmaceutical and chemical industries paid $27.4 million for a majority stake in its parent.

The transaction was completed in February 2021 and the GMM Pfaudler stock, which was around ₹1,300 then, has since been range-bound. On Friday, it ended trading on BSE at ₹1,385.05 per share—down 13% for the year.

GMM Pfaudler had estimated its combined revenue at about ₹2,000 crore at the time, adding that the acquisition had given it access to 12 manufacturing facilities across eight countries. For 2023-24, the company reported a consolidated operating revenue of ₹3,446.48 crore.

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Sudarshan Chemical has its task cut out for it—to integrate practically three companies and diverse cultures. It will also have to absorb a much larger balance sheet. Heubach had a topline of €879 million in 2023 ( ₹8,082 crore)—more than three times Sudarshan’s ₹2,539 crore revenue in 2023-24.

The Indian company reported a profit of ₹105 crore for FY24. For FY25, ICICI Securities’ analysts estimate a topline of ₹2,860 crore and a profit of ₹200 crore.

“We will start integrating probably from day one. As soon as we close (the transaction), we will want to make one company," Rathi said. “We have a strong understanding of the market. We are going to create a very strong management team that is going to define the way of doing business and the culture we want to create."

Sudarshan Chemical, which had net debt of ₹375 crore at the end of June, will fund the restructuring costs through a mix of debt and equity, Rathi said, adding that the company’s board was evaluating options to raise capital via the equity route.

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