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Will the Tatas sell Tata Chemicals?

Aug 25, 2000

For the first time after the resignation of Mr. Manu Sheth, Managing Director, Tata Chemicals, Mr. Ratan Tata, the Chairman of the Tata group of companies clarified the reasons for his resignation. In a statement, that appeared in ‘The Economic Times’ the chairman said “The board of Tata Chemicals and Manu Sheth had differences over some of the strategies. The company’s businesses need to be reviewed.” Tata Chemicals core businesses have done badly in the currently this year. While the soda ash business has been under facing pressure from Chinese dumping (China is reported to be dumping soda ash at costs which are lower than the variable costs required to produce soda ash.) The effect on Tata Chemicals’ prices have been palpable. Realisations dropped last year by over Rs 1,500 per tonne despite an 18% increase in volumes.

Realisations under pressure...
Soda Ash FY98 FY99 FY00
Capacity (tonnes) 875,000 875,000 875,000
Sales (Rs m) 666,456 546,499 644,971
Growth in sales2.4%-18.0%18.0%
Average Realisation (Rs per tonne) 9,562 9,459 7,851
Changes in realisation4.6%-1.1%-17.0%
Sales (Rs m) 6,372 5,170 5,064

The fertiliser scenario seems to be equally disastrous. 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.

Fertiliser companies such as Tata Chemicals book sales at retention prices and the difference between the retention prices and selling prices is shown as dues receivable from the government. During the last year the government notified the retention price for 1994–95 and 1995–96 and since the notified price was lower than what the company had booked in its turnover for those years, the company had to provide for Rs 800 m as a contingency provision. In FY2000, Tata Chemicals provided for contingencies amounting to Rs 1200 m from the year's profit. This infact was a provision for any shortfall in the notified retention price and the selling price for the previous two years.

In an effort to reduce the fertiliser subsidy the Government of India has appointed a committee under Mr. Y. K. Alagh for reassessment of plant capacities. Pending the findings of the committee, the Government has an interim measure reduced the retention price for Tata Chemicals’ by Rs 463 per tonne. This would result in a reduction of the fertiliser division by almost Rs 400 m in the current year.

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.

Besides, with crude prices still on the rise the feedstock prices for the industry viz. naphtha, fuel oil and gas have increased substantially over the last year. (Gas prices have increased by over 50% over the last twelve months.)

This is as far as the core businesses of the company are concerned. There have also been reports in the press that the management of the company has decided to handover the marketing of the salt to group company Tata Tea.

Even in the past Mr. Ratan Tata has made statements to the effect that he would like to curtail the group’s businesses to around 30 (from the level of 80 currently). With the problems hogging the core business and the adverse external environment facing its businesses, could Tata Chemicals be the divestment list of the Tatas?

Perhaps the only gray is the fact that the company holds substantial shares of Tata group companies. Besides, the company also has a 100% subsidiary in Sabras Investments which also holds shares in other Tata companies. (The book value of investments of Sabras Investments, which practically seems to be a holding company for the Tata group works out to almost Rs 1128 m in FY2000.)

The Tatas have decided to amalgamate the operations of Sabras within Tata Chemicals in the current year itself. Could this be the first step is hiving of the soda ash, fertiliser and cement business and converting the company into a holding company of the Tata group?

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