Tata Chemicals: Having a field day

Tata Chemicals has raised its stake in Rallis to 45 per cent at a cost of Rs 360 crore, buying the shares at Rs 850 apiece. It’s possible that the company used Rs 250 crore, recently raised through debentures, to buy the shares from other Tata companies. At Rs 850, Tata Chemicals has valued Rallis at close to 16 times 2008-09 earnings, which appears to be reasonable.

In 2008-09, Rallis posted a profit after tax of Rs 71.29 crore. As industry watchers point out, what Rallis brings to the table is a strong presence in branded farm solutions and an enviable pan-India distribution network. Rallis is not just a big player in pesticides, it also makes other agri-inputs such as bulk formulations chemicals to treat seeds. Since Tata Chemicals is in the fertiliser business, the two together make for a good play on Indian agriculture.

Rallis also has a flourishing overseas business which fetched it approximately a third of its Rs 853 crore revenues last year. Kotak Securities points out that the company has applied for 100 registrations across new and existing territories and has entered into new agreements with key customers for contract manufacturing.

Shareholders of Tata Chemicals may feel that the two companies could have worked together to their mutual benefit even if the stake in Rallis hadn’t been purchased. However, with a 45 per cent stake, there is likely to be greater efficiency and benefits of scale should come through, making the investment in Rallis worthwhile.