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Tata Chem: Restructuring paying off

Dec 7, 2001

A massive restructuring exercise undertaken by Tata Chemicals (TCL) last year seems to be yielding results for the company. The restructuring included a massive 25% reduction in its workforce, a conscious decision to exit non-core areas, a detailed plan to prune costs and a renewed focus towards marketing and brand building.

The revenue mix of the company is now skewed towards Soda Ash with a contribution of more than 40% coming from this business. After a free fall last year, due to Chinese dumping soda ash prices have shown a firm uptrend. Tata Chemicals is re-organizing every aspect of this business to improve efficiency. The company has set for itself a target to become the lowest cost soda ash producer in the world over the next three years. The company plans to cut costs by at least US $ 20-22/ tonne by various cost cutting measures. This is around 8-9% of the current International soda ash prices.

In the salt business, though the company was a pioneer in branded salts, it is having a tough time maintaining its leadership position due to competition from HLL. Besides a strong marketing push in the domestic market, Tata Chemicals is eyeing export opportunities in the Middle East. The urea business, though not lucrative, remains a cash cow for the company. The company remains one of the most efficient producers of Urea.

TCL plans to exit all non-core areas of businesses viz, cements and detergents. 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 0.3 m tonnes is also up for sale. Armed with huge operational cash flows and expected cash flow from sale of non-core businesses, TCL plans to get aggressive on the in-organic growth front.

The current year would also see a major change in the capital structure of the company. First, it plans to re-pay / swap high cost debt in its books. Further, the company recently acquired shareholder approval to buyback 15% of its share capital from open market purchases.

Assuming that the buyback of the company goes through in the current year, the stock trades at 4x our expected earnings for FY02. Tata chemicals has paid an average of dividend of Rs 5.5 in last ten years with an average dividend yield in the range of 11-15%.

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