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Tata Chemicals: prepared for urea deregulation

May 25, 2000

Tata Chemicals is one of the premier producers of urea and soda ash in the country with both the commodities accounting for roughly 50% of the company’s turnover. The past year has been tough for the fertiliser industry in general. With crude prices on the rise the feedstock prices for the industry viz. naphtha, fuel oil and gas have increased substantially over the last year. Of these the variable cost for the urea based on gas is the lowest (see table).

Variable Cost per tonne of urea
YearGasNaphthaFuel OilCoal
FY92 1,797 2,724 2,252 3,461
FY96 2,242 4,308 3,672 5,421
FY99 2,806 6,160 5,045 7,904
Source: FAI, New Delhi

The backbone for the industry so far has been the retention pricing scheme which works as follows: the selling prices of the fertiliser are fixed by the government and so are the retention prices for the producers. The difference between the higher retention price for the producer and the lower selling prices are paid to the producers by the government. These are based on covering the variable cost and fixed costs and giving a return of 12% on the networth.

The government however is thinking of implementing the Hanumantha Rao Committee recommendations, which imply that the fertiliser companies would now only be reimbursed only their variable costs and that too at a uniform rate for the industry (unlike a different price for each company as prevalent currently). This would imply tough times for both the units using the more expensive feedstocks and the newer units such as Oswal Chemicals and Nagarjuna Fertlisers.

Tata Chemicals’ gas based plant is situated at Babrala along the Hazira–Bijapur–Jagdishpur pipeline. The company’s main markets are situated in Punjab, Haryana and Uttar Pradesh, which have been witnessing an excess stock situation. However, the main downside for the company is that its cash flows are dependent on when the government releases the subsidy amount.

This is because the company books its sales at retention prices and the difference between the retention prices and the selling prices (Rs 4,600 per tonne for urea after the latest budget) are shown as dues receivables from the government. Therefore the actual cash flows are much less than what appears from examining the profit and loss account. In its annual accounts ended March 1999 had mentioned an outstanding balance of Rs 3129 m from the government (the net cash before operating activities for the company for the year was Rs 2734 m).

The positives for the company are the fact it seems to be one of the few companies in the fertiliser industry, which seems to be prepared for deregulation. Its feedstock prices are among the lowest in the industry, it supplies to the lucrative northern markets which account for 40% of the urea consumption in India and its cash and bank balances account for almost Rs 10 per share (CMP: Rs 40). This does not take into account the book value of investments (Rs 1109 m) of its 100% subsidiary viz Sabras Investments which is practically a holding company for the Tata group (we take the book value of investments since these investments are not expected to be sold).

Investments
Equity SharesNumberCMPValue (Rs m)
ACC 225,703 370* 84
Rallis India 560,000 86 48
Tata Finance 2,382,500 52 124
Tata Investment Corporation 693,246 86 60
Tata Steel 1,445,000 118 171
Tata Tea 2,352,179 353 830
Timex Watches 500,000 9 5
Titan Industries 1,430,580 63 90
Book Value of the Unquoted Investments   1,345
US–64 2,363,892 14 33
Cash and Bank balances   103
Total market value   2,892
Less: Other Income reported in first nine months **   929
Net Investments plus cash & bank balances (Rs m)   1,962
Cash and Investments per share of Tata Chem   10.9
* ACC shares are assumed to be sold to Gujarat Ambuja
** assumed to be sale of investment

At a market capitalisation of 0.5 times its expected turnover for FY 2000 and an expected dividend yield of 12.5% the blue chip of the Indian chemical industry seems to be going dirt cheap even by old economy standards.

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