Tata Chemicals seems to be a fresh, lean, thin and re-charged organisation. The company is going through a massive restructuring and reorganizing process. Consider this to feel the effect. A VRS covering 25% of the labour force, has just been completed, the company seems committed to exit non-core businesses, an extremely detailed business plan has been chalked out to improve operational efficiency, there is renewed focus on marketing, the company is talking of an aggressive in-organic growth and entry into other related businesses etc.
As part of its new long-term strategy, the company intends to focus on its following core business.
Though, there is a demand supply mismatch currently, the consumption growth is increasing faster with higher usage in detergents and glass. After a free fall last year, because of Chinese dumping, prices of soda ash are showing a firm trend.
The company is re-organizing every aspect of the business to increase efficiency and has set for itself a target to become the lowest cost synthetic soda ash producer in the world in next three years. The company plans to prune at least US$ 20-22 per tonne by various cost cutting measures.
Salt: Though, the company’s brand ‘Tata Salt’ has been a pioneer in the branded edible salt segment with highest market share, HLL’s ‘Annapurna’ brand is giving a tough competition to the company in this segment. TCL has embarked upon a two-pronged strategy to maintain its leadership position. One, it plans to have an aggressive marketing strategy in place to achieve higher domestic market share and secondly, improving operating efficiency further. The prospects for branded edible salt are positive with the demand expected to grow at 15% p.a.
As part of its strategy to improve profitability and expand business, the company is also evaluating various export opportunities. The export market of vacuum salt is lucrative with international salt prices ranging upto US$ 1/kg as compared to US$ 0.2/kg in the domestic market. TCL plans to launch its own branded salt in the Middle East in the next six months.
Fertilisers: TCL is one of the most efficient producers of urea in the world. The outlook for fertilisers remains good for the company as it expects to benefit from the prospective de-control due to operational efficiencies and superior margins. TCL’s urea plants enjoy feed stock flexibility and locational advantage. The company has one of the most efficient distribution networks backed by marketing alliance with Rallis, an acknowledged leader in agri-product distribution in the country.
TCL plans to expand into high margin potassium and phosphorus based fertilisers as also expand its geographical presence.
Other Non-core businesses: The company plans to unlock value from all non-core businesses as soon as possible. As far as detergents business is concerned there is a MoU with Jyothi Labs, though the sale price has not been decided. The cement business with a clinker capacity of 0.32 m tonnes is also up for sale.
New Opportunities: TCL is aggressively looking at various opportunities both through organic as well as inorganic route in its core areas of operations. An independent agency, within the group has been appointed to review the business portfolio of the company.
TCL sees a host of opportunities in agro-chemicals and fertiliser business. The company is confident to double its salt and soda ash business turnover within a 3 year time frame.
Other cost reduction measures:TCL has restructured its loan portfolio, bringing down interest cost to around 14% from a peak of around 18%. Besides, it is looking at various measures to bring down working capital requirement.
Dominance and improved efficiency in core businesses: The stage seems all set for the company to become a globally competitive player in all its core businesses. The company’s ongoing initiatives to improve operational efficiencies both at the micro and macro levels would translate into actual gains, though not immediately. The company is one of the few companies in the fertiliser industry, which seems to be prepared for a fertiliser deregulation.
Robust cash flows: Post merger with its subsidiary, Sabras Investment, TCL would have strong cash flows. After sale of its stake in ACC, the subsidiary had around Rs 3.2 bn in liquid instruments. The sale of ACC stake has yielded a cash flow of around Rs 2.5 bn. Besides, TCL itself had investments of around Rs 2 bn as on March 2000. The per share value of the above investments works out to Rs 42 per share. Besides, the sale of its non-core businesses would yield additional cash flows for the company. Given the strong cash flows the company is well positioned to take advantage of any in-organic growth opportunities.
At the current market price of Rs 46, the company looks attractive given the future roadmap drawn by the company and more so because of attractive dividend yield of 11%. But an investor also needs to understand that though all the restructuring measures, which the company is embarking upon, seem to be in the right direction, it will take time before they translate into actual gains. Again, the threat of dumping remains considering that the customs duties have been further slashed in the recent budget. Further, the future fertiliser scenario in the country still remains unclear and even the most efficient players are at the mercy of the government.
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