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Tata Chemicals – Undergoing a transition - Views on News from Equitymaster
 
 
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  • Sep 9, 2000

    Tata Chemicals – Undergoing a transition

    “The company’s businesses need to be reviewed.” That was Mr. Ratan Tata’s comment at the Annual General Meeting of Tata Chemicals (TCL) held recently. The reasons are obvious. The company’s core businesses are in bad shape. The external environment is distinctly unfriendly. And the government’s reform measures for the industry seem to be quite inadequate. We take a look at each of the company’s businesses.

    The company’s soda ash operations have been facing the brunt of Chinese dumping. (China is reported to be dumping soda ash at costs, which are lower than the variable costs required to produce soda ash.) Hence despite a 43% market share and an 18% increase in volumes, Tata Chemicals’ soda ash realisations dropped by over Rs 1,500 per tonne last year. This itself speaks volumes about the pricing power of the country’s inorganic chemical players.

    Soda Ash FY98 FY99 FY00
    Capacity 875,000 875,000 875,000
    Sales 666,456 546,499 644,971
    Growth in sales 2.4% -18.0% 18.0%
    Average Realisation (Rs per T) 9,562 9,459 7,851
    Chg in realisation 4.6% -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 1,200 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.

    Further, in an effort to curb gold plating by fertiliser companies the government reassessed the stated fertiliser capacities of Tata Chemicals and increased it by 15%. This was an interim measure pending the findings of a government appointed committee for reassessment of plant capacities. This resulted in a reduced retention price for Tata Chemicals’ by Rs 463 per tonne. This is likely to result in a reduction of the fertiliser division by almost Rs 400 m in the current year.

    Urea FY98 FY99 FY00
    Capacity 742,500 742,500 853,875
    Sales (MT) 972,693 925,414 964,200
    Growth in sales -3.1% -4.9% 4.2%
    Average Realisation (Rs per T) 7,952 7,682 8,117
    Chg in realisation 4.5% -3.4%
    Sales (Rs m) 7,735 7,109 7,827

    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 hitting a 10 year high (at US $ 35) the higher feedstock prices (for naphtha, fuel oil and gas) are likely to hit the company in the coming year too. (Gas prices have increased by over 50% over the last twelve months.)

    Besides, the company also has a presence in detergents and cement. However the detergent brand ‘Shudh’ needs a relaunch and the company seems in no position to increase its share of voice by increasing advertisement spending. The presence of a 4.40 lakh cement plant in Tata Chemicals is ironical since the Tatas themselves have sold off their 14% stake in India’s biggest cement company ACC. All in all Tata Chemicals seems to be an ideal case study for the proponents of core competence.

    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 grey area 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 1,128 m apart from the Tata Chemicals’ own investments in group companies worth Rs 2,051 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 detergent, cement, soda ash, and fertiliser business and converting the company into a holding company of the Tata group?

     

     

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