"Tata Chemicals should see some aggressive growth going forward." - Views on News from Equitymaster

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  • Apr 6, 2002 - "Tata Chemicals should see some aggressive growth going forward."

"Tata Chemicals should see some aggressive growth going forward."

Apr 6, 2002

Mr. Prasad Menon, 56, is a chemical engineer from IIT, Kharagpur. He has worked with ICI for 20 years in various capacities before joining Nagarjuna Group where he has another 11 years of experience to his credit. He is currently the Managing Director of Tata Chemicals. In a candid interview to Equitymaster.com, Mr. Menon spoke at length how the company is steadily moving towards its target of achieving lowest synthetic soda ash cost producer status globally. He spoke about the companyís drive for cost competitiveness, the concerns and prospects for the company going forward. Finally he displayed confidence of fuelling organic/ inorganic growth for the company going forward.

EQTM: The finance minister has spoken about reducing import tariffs to 20% over a period of time. Currently, the soda ash industry is also protected through CVDís. In the past the domestic industry has also suffered on account of Chinese dumping. Can the industry survive with low or no import tariffs?

Mr. Prasad: As far as the finance ministerís statement is concerned, I think what he has said is to bring down the customs duty to 20% on finished goods and 10% on raw materials. So what we really have to prepare ourselves is a regime where there would be little or no protection to the domestic industry.

Frankly, if you were to ask me, whether the Indian industry is prepared or not for that regime? I think it is not. But I think the reality is it may happen only in 2004-06. The Indian industry is clearly seeing the writing on the wall and is preparing itself for that challenge.

At Tata Chemicals, I think we are absolutely prepared for that eventuality. I strongly feel that by then we would be in a position to not only match the import price but also be competitive on a global basis. This would happen by cost cutting and other improvement exercises. We have already hired international consultant McKinsey to look into operational improvement, which, to a large extent is dictated by areas for cost improvement. I believe we have already improved a lot on raw materials and power cost. In my view we have already achieved a quarter of our cost cutting targets. By 2004, we should be able to achieve our targets.

EQTM: As we understand, Tata Chemicals plans to become lowest cost producer of soda ash in the world by 2004. What has been the progress so far on this front? What is the global and domestic demand/ supply scenario for soda ash?

Mr. Prasad: We have kept ourselves a target of becoming the lowest cost producer of synthetic soda ash in the world. We cannot meet the production cost of natural soda ash. But then most of the natural soda ash is mostly produced in the middle of the United States where we do have freight advantage. I think we are well on our way to become the lowest cost producer of synthetic soda ash globally.

We do have a capacity overhang in the domestic market and most of the industry is operating at 75% of the capacity utilization. What we are trying to do is to utilize the remaining capacity for exports. Globally, also the scenario is not very different with around 80% capacity utilization. However, unlike India, the global industry is very flexible. Capacities/ productions close down in line with demand. Since global phenomenon of over capacity has been there for few years now, there is a fair amount of restructuring taking place and lot of capacities have either been postponed or closed down. And this is reflected in the reasonable amount of firming up in prices. However, we donít expect the prices to go up either.

In the last year, despite the fact that there was a fire at Tata Chemicals factory, and we reduced our production considerably, global prices did not firm up. They have remained steady at US$ 135. We see the situation continuing for some time. There was a time around 3-4 years ago when soda ash industry actually went through a great difficultly because of lower prices. Possibly, with the closing of the gap those are getting firmer. In India, most of the rectification is still due. And thus, we have to go by what import prices are and be competitive even at much lower prices. I think as far as dumping is concerned the government is doing a good job. The action from the government on this front has been much quicker. Dumping is an issue that we can fairly protect ourselves from. We would be aggressively looking at exports from the next year and would be mainly targeting the Middle East and South East Asian markets, due to freight advantage.

EQTM: What are the overall growth prospects for branded salt business in the domestic market? How has been the response for ĎTata Saltí in the Middle East markets, where the company plans to export?

Mr. Prasad: As far as the domestic markets are concerned, we have been growing at 6-8% p.a. Of course, the growth has slowed down from the 15-16% we were seeing some two years ago. But it is a market that is very very competitive. As you know that are 2-3 new brands that have also come up. Still we have been able to regain our No. 1 position. Infact from December, we are back to No. 1 ahead of Annapurna. And we are very heartened by the response.

Recently, we have revamped our distribution network completely and improved distribution reach all across the country and we continue to look for new areas for marketing penetration. We have relooked at branding; we have brought in people for product management, brand management, revamped our distribution network, we have increased our marketing infrastructure by a factor of 3-4, opened up a number of new offices. We have set ourselves a very aggressive target here.

Further, we are also looking at areas where we were weak in the past, particularly the southern markets. So there has been a complete change in our distribution strategy and we have roped in TCS to hook in our distributors across the country, to have better linkages with our distributors and cut cost in the supply chain.

As far as Middle East markets are concerned, we are in the process of identifying target markets, looking at possible price levels and packaging etc. We hope to place the products in these markets in another 6-9 months. We are definitely looking at exports.

EQTM: Tata Chemicals is the most efficient producer of urea in the world. However, the fertilizer business of the company continues to be regulated by the government. How do you see this business moving in the emerging fertilizer scenario of the country?

Mr. Prasad: I am not sure whether we are the most efficient producer across the globe, but definitely we are the most efficient as far as the domestic markets are concerned. As you know, the government has already created a group of ministers to relook at the fertilizer policy. We are awaiting their liberations. I think in the short term we would continue to be controlled in terms of pricing, as I donít see freeing of prices to happen soon.

But over a period of 3-6 years period, I think the government would progressively decontrol the regulation on pricing over fertilizers. And I think we are well placed to take advantage of this both in terms of our efficiency and as well as our location. As of know, we are not planning to ramp our capacity. We would see how things would work out in terms of fertilizer de-regulation. And then we also have to look at the government Ďs policy on the pricing of feedstocks, availability of LNG, pricing of natural gas, etc.

EQTM: Your comments on the organic and inorganic growth strategies of the company. Also update us on your plans to hive off cement and detergent business?

Mr. Prasad: Well, at this point we wonít like to comment on any specific issues. We have commissioned McKinsey to figure out our long-term growth strategy and we are in the midst of looking at number of possible growth platforms. And hopefully by the end of the year we would come out with specific growth strategy. We are looking at how do we grow our current businesses, what are possible extensions to our current businesses and also at completely new businesses.

I think as far as hiving off of the detergents business to Jyothi Labs is concerned, it is almost over now, except some legal issues. As far as cement is concerned we have not yet looked at it. We are evaluating various options and will certainly take a decision soon.

EQTM: What is your vision for Tata Chemicals over the next five years?

Mr. Prasad: We certainly have set ourselves the target of meeting the groupís growth norms. Tata group has set a norm of doubling sales every four years and doubling profit every three years and having a positive EVA for all its group companies. We have also to make sure that whatever businesses we are in, we have to be among the top three players. So certainly that is what we would aim for.

A message that I would like to give to the shareholders is that Tata Chemicals is going through a tremendous transformation and certainly we should see some aggressive growth going forward. The last year was a year of consolidation within the business in terms of improving our markets, improving our customer relationship, improving our cost bases and improving our human resources. We are also looking at new businesses and new growth initiatives. I believe all this should translate in to shareholder value over a period of time.

EQTM: Tata Chemicals plans to buyback a large chunk of its float. Kindly explain the rationale for the same? What is the current status of the buyback program?

Mr. Prasad: At this point, I would just like to say that board has cleared the proposal for the buyback, which has been communicated to the stock exchange. We havenít really finalized at the financing strategy of the buyback program.

EQTM: On a lighter note, your favorite books/ personalities that have influenced you the most?

Mr. Prasad: I do read a combination of fiction and management books.


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