Tata Chemicals (TCL) is one of India’s leading manufacturers of inorganic chemicals and fertilizers. It is also the largest manufacturer in the world of synthetic soda ash. The company also operates a salt works capable of generating 2 m tonnes of solar salt (starting raw material for most of the basic chemicals that it produces) and a fertilizer complex with an installed capacity of 0.7 m tonnes.
While the inorganic chemicals are manufactured in the Mithapur plant (Gujarat), fertilizers are produced in the Babrala plant (U.P.). The inorganic chemicals complex in Mithapur is India’s largest and most integrated plant. The four major divisions in Mithapur are soda ash, chloro-caustic group, marine chemicals and salt, and cement. The company has an installed capacity of 0.9 m tonnes of soda ash, i.e., about 42% of the country’s capacity. TCL has a market share of 38% in soda ash. The user industries are detergent and glass industry. In view of the excess capacity position in the industry, TCL is increasingly looking at exports to increase its capacity utilization.
TCL is also a leading producer of industrial and edible salt in the country. The company is a pioneer in the branded edible salt segment with ‘Tata Salt’ commanding a market share of 38%. Recently, the company has successfully launched a second cheaper brand of salt – ‘Samunder’. However, with the aggressive launch of brands by new entrants, branded salts market is expected to witness stiff competition going forward, which could affect the market share of the company. Apart from the above, the other major products manufactured by the company from the Mithapur plant are sodium bicarbonate, marine chemicals, chlor-caustic and gypsum.
TCL’s fertilizer division has an installed capacity of 0.9 m tonnes of urea, which constitutes nearly 12% of the total urea produced by the country’s private sector. However, as the government fixes the prices of urea under the Retention Price Scheme, the company’s fortunes are dependent on the same. However, with the new long-term fertilizer policy likely to be announced soon, Tata Chemicals (being a low cost producer) will be in a position to reap the benefits from the same.
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|Growth in PAT
Despite poor rainfalls affecting the urea demand and intense competition in the branded salts segment, aggressive marketing and revamping of sales & distribution initiatives taken up by TCL has helped it record growth in its topline. Moreover, exports have also helped the company record improvement in the topline. Further, TCL has also been able to retire debt to the tune of Rs 2.4 bn in FY03. The debt levels stood at 8.2 bn in FY03. Due to these initiatives, the average cost of borrowings has gone down from 11.2% in FY02 to 9.7% in FY03. With the company now concentrating upon improving operational efficiencies, the operating margins and consequently the bottomline of the company may see a sharp improvement.
In 1QFY04, the company recorded net sales of Rs 3 bn and a net profit of Rs 485 m. The performance of the company was impacted due to poor market conditions in the urea business resulting in lower sales. The company has recently acquired Hindustan Lever Chemicals Ltd (HLCL). The appointed date for the amalgamation is 1st April ’02. However, as the necessary statutory approvals have not been received, the results do not include the financials of HLCL. The acquisition is expected to help the company strengthen its presence in the eastern region.
At Rs 116, TCL is trading at a P/E of 11x its annualised 1QFY04 earnings. The cost cutting measures undertaken by the company and the acquisition of HLCL and the resultant increase in market share augur well for the company going forward. This apart the huge investments made by TCL in other Tata group companies and its strong cash flow also add to its valuations.
However, concerns remain over the company’s two key products – Urea and Soda ash. While soda ash is facing intense competition from imports, realizations and margins could suffer going forward. On the other hand, Urea prices are impacted by government policies and vagaries of monsoon. Further, as was mentioned earlier, TCL is a big investor in most Tata Group companies. Though this is a positive when valuations of the Group go up, the shareholders may not benefit, as it is unlikely to unlock this value. Also, this raises doubts that Tata Chemicals is a holding company and not a core business for the Tata Group.