 "Sale of urea business big positive for Tata Chemicals")
The Tata Chemicals stock gained about nine per cent on Wednesday after the firm announced sale of its urea business to Yara Fertilisers India. The deal, come as positive news for the Street, will fetch Tata Chemicals Rs 2,670 crore and add to its earnings and return ratios.
Urea is a part of Tata Chemicals’ fertiliser business and contributed Rs 2,301 crore (21.20 per cent) to its turnover in FY16. Although urea’s contribution is substantial, the regulated business fetched low margins and, hence, value unlocking through sale seems a better option.
Analysts say ebit (earnings before interest and tax) margins for the business range between three and four per cent, compared to the chemicals business and others that enjoy 17-18 per cent margins. Sageraj Bariya at East India Securities says profitability of the larger urea business was comparable to the smaller agro trading business. Given the low profitability and interest, the urea business remained a drag on return ratios (like return on equity and capital employed).
As part of the Tata group strategy, Tata Chemicals has been looking at divesting stakes in the non-core businesses, in line with its ambitious ‘Leap 2020’ vision announced at the beginning of FY16. It has targeted tripling its market capitalisation, rise in revenue from the consumer business to Rs 5,000 crore from Rs 1,500 crore), enhancing farm business revenue (non·subsidised, largely crop chemicals and micro·nutrients) to Rs 8,000 crore from Rs 2,500 crore, and also improving chemicals’ revenues to Rs 12,000 crore, from Rs 8,500 crore, said R Mukundan, managing director, Tata Chemicals.
In the backdrop it is not surprising that the company wants to focus on segments as chemicals (comprises soda ash, sodium Bi-carbonate, etc), branded salts and I-shakti businesses. In the farm segment, it will still be left over with non-subsidised crop chemicals and the micro-nutrients businesses, apart from complex fertilizers, which are more profitable.
The outstanding fertiliser subsidy according to them comprises 20 per cent of the current net debt, and factoring Rs 2,000-2,500 crore valuation for the fertiliser business it could potentially reduce net debt to less than half of current level. Given the low profitability of fertiliser segment, merely deleveraging of the balance sheet and sell-off of the assets will be earnings accretive, they add.
Urea is a part of Tata Chemicals’ fertiliser business and contributed Rs 2,301 crore (21.20 per cent) to its turnover in FY16. Although urea’s contribution is substantial, the regulated business fetched low margins and, hence, value unlocking through sale seems a better option.
Analysts say ebit (earnings before interest and tax) margins for the business range between three and four per cent, compared to the chemicals business and others that enjoy 17-18 per cent margins. Sageraj Bariya at East India Securities says profitability of the larger urea business was comparable to the smaller agro trading business. Given the low profitability and interest, the urea business remained a drag on return ratios (like return on equity and capital employed).
As part of the Tata group strategy, Tata Chemicals has been looking at divesting stakes in the non-core businesses, in line with its ambitious ‘Leap 2020’ vision announced at the beginning of FY16. It has targeted tripling its market capitalisation, rise in revenue from the consumer business to Rs 5,000 crore from Rs 1,500 crore), enhancing farm business revenue (non·subsidised, largely crop chemicals and micro·nutrients) to Rs 8,000 crore from Rs 2,500 crore, and also improving chemicals’ revenues to Rs 12,000 crore, from Rs 8,500 crore, said R Mukundan, managing director, Tata Chemicals.
In the backdrop it is not surprising that the company wants to focus on segments as chemicals (comprises soda ash, sodium Bi-carbonate, etc), branded salts and I-shakti businesses. In the farm segment, it will still be left over with non-subsidised crop chemicals and the micro-nutrients businesses, apart from complex fertilizers, which are more profitable.
The outstanding fertiliser subsidy according to them comprises 20 per cent of the current net debt, and factoring Rs 2,000-2,500 crore valuation for the fertiliser business it could potentially reduce net debt to less than half of current level. Given the low profitability of fertiliser segment, merely deleveraging of the balance sheet and sell-off of the assets will be earnings accretive, they add.