An across the board rejuvenation exercise undertaken by Tata Chemicals recently seems to be yielding results. The company has already achieved considerable success in its efforts to cut costs on both macro and micro front. The stage seems set for the company to become a globally competitive player in the soda ash business. This seems to be a big leap for the company as the industry, has hitherto survived primarily due to domestic tariff protection.
The progress and strategy of the company in each of its core business is outlined below.
The scenario for the soda ash industry continues to be challenging. The demand supply mismatch continues and the current reduction in import duty to 20% has come as a blow to the industry. However, on the positive side, global prices have firmed up and are expected to remain stable negating the impact of duty reduction. Within the demand segment, capacity expansion in domestic glass manufacturing is expected to improve demand situation.
Tata chemicals has been able to prune US $ 10 per tonne of cost and is targeting similar reduction over the next two years. 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 over the next two years.
Tata Salt has been a pioneer in the branded edible salt segment with highest market share. However, HLL’s ‘Annapurna’ brand and some new brands like ‘Dandi’ are keeping the company on its toes. After a short slip in market share, the company has regained its market share in the branded salt business. The opportunity in salt business is to capture a large chunk of un-branded market, which is still a giant 73% of the total market size. Branded salt market itself is expected to grow at 4-5% 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 up to US$ 1/kg as compared to US$ 0.2/kg in the domestic market. Tata Chemicals has already started exports to Middle East countries and plans to further explore South East Asian Countries.
Tata Chemicals is one of the most efficient producers of urea in the world. The outlook for fertilizers remains good for the company as it expects to benefit from the prospective de-control due to operational efficiencies and superior margins. The company’s urea plants enjoy feed stock flexibility and location 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. The company plans to expand into high margin potassium and phosphorus based fertilizers and also expands its geographical presence.
Read our recent interview with Mr. Prasad Menon, MD, Tata Chemicals.
Tata Chemicals plans to unlock value from all non-core businesses as soon as possible. The company has already exited detergents business. A decision on the divestment of its cement business with a clinker capacity of 0.32 m tonnes is also expected soon. Amongst other cost reduction measures, the company has restructured its loan portfolio, bringing down interest cost to around 12% from a peak of around 18%. Besides, it has initiated various measures for improving working capital efficiencies.
In the absence of major expansion plans, the company has robust cash flows every year. Apart from this the company also has Rs 4.3 bn in investments (which is equal to 50% of the company’s current market capitalization). Most of these investments are either liquid or invested in Tata group companies, which could unlock considerable value going forward.
However, with this substantial amount of money blocked in investments, the company’s RoCE is impacted considerably. The RoCE of the company has dropped from almost 15% in 97-98 to mere 7% expected for FY02. To counter this situation, the company has initiated a major buyback program. The company has allotted Rs 1.3 bn for its buyback program, which would be through the open market route at a maximum price of Rs 60 per share. At the current market price of Rs 47, this translates into a buyback of 27m shares (15% of its total outstanding shares).
The company looks attractive given the future roadmap drawn by the company and more so with a dividend yield of 11%. However, one should keep in mind that commodity business is prone to business cycles and the threat of international dumping (especially with custom duties sloping downwards) remains. Further, the future fertilizer scenario in the country still remains unclear and even the most efficient players are at the mercy of the government.