 "Tata Chemicals moves away from infertile ground")
Tata Chemicals first entered the fertiliser business in 1994 through a unit set up at Babrala, Uttar Pradesh. In two decades, it was operating a 1.2 million-tonne urea unit at Babrala and a phosphatic fertiliser unit at Haldia, West Bengal. However, now the company is moving away from the fertiliser business as it looks to focus on its chemicals and consumer business.
On August 10, Tata Chemicals agreed to sell its urea business to Yara Chemicals for Rs 2,670 crore. Proceeds from the sale, the company said, will be reinvested in its consumer and inorganic chemicals business.
Once the deal is done, the company will be left with the Haldia unit alone in its fertiliser portfolio. The company remains open to bringing in a partner for this unit. “Necessary steps would be taken if a good partner emerges,” said R Mukundan, managing director for Tata Chemicals at the press conference announcing the deal.
The clean-up at Tata Chemicals started under Cyrus Mistry, the group chairman. The company announced the closure of its soda ash and calcium chloride factory in Winnington in October 2013 in response to the rising energy costs in the UK. In May 2014, Tata Chemicals announced the mothballing of its premium soda ash plant at Magadi in Kenya, primarily for the same reason. Tata Chemicals is currently the second-largest producer of soda ash in the world.
In 2014, post the restructuring, the company said it is shifting focus to achieve a similar scale in its consumer business.
It had entered the branded pulses segment in 2010 under the i-Shakti brand, and in 2015, it ventured into branded spices with Tata Sampann.
At the press conference on August 10, Mukundan said the sale is part of the company’s strategy to cap capital investments in the fertiliser business and focus on increasing the scale of the consumer as well as the farm business, while maintaining global leadership in the inorganic chemicals sector.
“We have seen steady growth in investing in the salt franchise and we would do the same in the other products that we have entered into,” Mukundan said. “These products need a long period of nurturing. The salt franchise was built beyond 25 years. We are not planning to take that long.”
Tata Chemicals with Tata Salt held 60.3 per cent share in the branded edible salt market in financial year 2015-2016.
Regulatory limitations in the fertiliser business are likely to have forced Tata Chemicals to give a second thought to its fertiliser business. The decision to sell its urea business is part of the company’s strategic plan to exit from businesses with significant government regulations.
A controlled sector
“The fertiliser business, which includes urea as well as phosphatic fertilisers, has been affected due to government’s control of prices and delay in disbursement in subsidies,” Rohan Gupta and Pratik Tholiya, analysts with Emkay Global wrote in the August 10 note as the key takeaways from the management’s call with analysts on Tuesday. As of June 30, the company had Rs 1,479 crore as outstanding subsidy.
The heavily regulated fertiliser sector in India does not allow Tata Chemicals much scope to increase profitability. “The opportunity of making high profit in the next one or two years is not there,” said Mayur Bhutani, senior analyst, India Ratings. “Not many businessmen would want to get bound by the shackles of the government regulations under which this sector operates.”
The fertiliser business contributed 38.34 per cent to the company’s total revenue in the financial year 2015-2016. Revenue contribution from the inorganic chemical business stood at 47.85 per cent in the same period. The Babrala plant alone generated revenue of Rs 2,244.50 crore and earnings before interest, taxation, depreciation and amortisation, or EBITDA, of about Rs 230 crore in the financial year 2015-16.
“The new urea subsidy formula for production beyond reassessed capacity, which the government has come up with, is a better formula but the upside for profits has been capped,” Bhutani said. “One will not be able to make profit beyond a certain level even if the urea import parity price increases because then the payout will become a function of efficiency. The scope of efficiency improvement is limited and requires capital investment. Moreover, delays in subsidy payout are likely to remain, entailing high working capital requirements.” The Babrala plant is one of the most efficient fertiliser plants in the country.
In its rating rationale note on August 12, Credit Rating Information Services of India Limited, or Crisil, also highlighted regulatory hurdles as one of the risk factors. “Other risk factors include the regulated nature of the fertiliser industry and large working capital debt to fund subsidy receivables from the government of India,” the rating agency said. “The fertiliser industry will remain exposed to developments on the regulatory and government policy fronts, over the long term.” Crisil reaffirmed an A-plus rating for the company post announcement of the deal.
Where the profits lie
Tata Chemicals’ consumer and chemicals businesses have also delivered better returns compared to its fertiliser business. According to the Emkay report, return on assets from the fertiliser business was lower at 6 per cent as compared to 13 per cent for its consumer and 12 per cent for its industrial chemical business in the last financial year.
“The company’s profit after tax is expected to increase by 5 per cent, assuming [that] funds from sale proceeds generate interest income, while return on capital employed (ROCE) may improve by 250-300 basis points as low ROCE business is knocked off from the balance sheet,” Gupta and Tholiya from Emkay wrote in the note.
The move to divest also fits well with the larger Tata group strategy to exit less profitable or loss-making businesses. For instance, group company Tata Steel is also on the lookout to find a buyer or joint venture partner for its steel making facilities in Europe in a bid to cut mounting losses.
However, Tata Chemicals may find it difficult to divest from its residual fertiliser business. “We think it might be more challenging to find buyers for the non-urea part of TCL’s fertiliser operations, considering its inferior financial profile relative to urea, which is reflected in its wafer-thin margins and minimal earnings,” analysts Abhijit Akella and Nikunj Gala wrote in an India Infoline Research note on August 11. “Unlike urea, the phosphate business is not backward-integrated to the fullest, and this would dissuade foreign buyers,” they added in the note.
The Tata Chemicals spokesperson refused to comment.
On August 10, Tata Chemicals agreed to sell its urea business to Yara Chemicals for Rs 2,670 crore. Proceeds from the sale, the company said, will be reinvested in its consumer and inorganic chemicals business.
Once the deal is done, the company will be left with the Haldia unit alone in its fertiliser portfolio. The company remains open to bringing in a partner for this unit. “Necessary steps would be taken if a good partner emerges,” said R Mukundan, managing director for Tata Chemicals at the press conference announcing the deal.
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The decision is in sync with a larger restructuring strategy that began in 2013.
The clean-up at Tata Chemicals started under Cyrus Mistry, the group chairman. The company announced the closure of its soda ash and calcium chloride factory in Winnington in October 2013 in response to the rising energy costs in the UK. In May 2014, Tata Chemicals announced the mothballing of its premium soda ash plant at Magadi in Kenya, primarily for the same reason. Tata Chemicals is currently the second-largest producer of soda ash in the world.
In 2014, post the restructuring, the company said it is shifting focus to achieve a similar scale in its consumer business.
It had entered the branded pulses segment in 2010 under the i-Shakti brand, and in 2015, it ventured into branded spices with Tata Sampann.
At the press conference on August 10, Mukundan said the sale is part of the company’s strategy to cap capital investments in the fertiliser business and focus on increasing the scale of the consumer as well as the farm business, while maintaining global leadership in the inorganic chemicals sector.
“We have seen steady growth in investing in the salt franchise and we would do the same in the other products that we have entered into,” Mukundan said. “These products need a long period of nurturing. The salt franchise was built beyond 25 years. We are not planning to take that long.”
Tata Chemicals with Tata Salt held 60.3 per cent share in the branded edible salt market in financial year 2015-2016.
Regulatory limitations in the fertiliser business are likely to have forced Tata Chemicals to give a second thought to its fertiliser business. The decision to sell its urea business is part of the company’s strategic plan to exit from businesses with significant government regulations.
| STRATEGY SWITCH |
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A controlled sector
“The fertiliser business, which includes urea as well as phosphatic fertilisers, has been affected due to government’s control of prices and delay in disbursement in subsidies,” Rohan Gupta and Pratik Tholiya, analysts with Emkay Global wrote in the August 10 note as the key takeaways from the management’s call with analysts on Tuesday. As of June 30, the company had Rs 1,479 crore as outstanding subsidy.
The heavily regulated fertiliser sector in India does not allow Tata Chemicals much scope to increase profitability. “The opportunity of making high profit in the next one or two years is not there,” said Mayur Bhutani, senior analyst, India Ratings. “Not many businessmen would want to get bound by the shackles of the government regulations under which this sector operates.”
The fertiliser business contributed 38.34 per cent to the company’s total revenue in the financial year 2015-2016. Revenue contribution from the inorganic chemical business stood at 47.85 per cent in the same period. The Babrala plant alone generated revenue of Rs 2,244.50 crore and earnings before interest, taxation, depreciation and amortisation, or EBITDA, of about Rs 230 crore in the financial year 2015-16.
“The new urea subsidy formula for production beyond reassessed capacity, which the government has come up with, is a better formula but the upside for profits has been capped,” Bhutani said. “One will not be able to make profit beyond a certain level even if the urea import parity price increases because then the payout will become a function of efficiency. The scope of efficiency improvement is limited and requires capital investment. Moreover, delays in subsidy payout are likely to remain, entailing high working capital requirements.” The Babrala plant is one of the most efficient fertiliser plants in the country.
In its rating rationale note on August 12, Credit Rating Information Services of India Limited, or Crisil, also highlighted regulatory hurdles as one of the risk factors. “Other risk factors include the regulated nature of the fertiliser industry and large working capital debt to fund subsidy receivables from the government of India,” the rating agency said. “The fertiliser industry will remain exposed to developments on the regulatory and government policy fronts, over the long term.” Crisil reaffirmed an A-plus rating for the company post announcement of the deal.
Where the profits lie
Tata Chemicals’ consumer and chemicals businesses have also delivered better returns compared to its fertiliser business. According to the Emkay report, return on assets from the fertiliser business was lower at 6 per cent as compared to 13 per cent for its consumer and 12 per cent for its industrial chemical business in the last financial year.
“The company’s profit after tax is expected to increase by 5 per cent, assuming [that] funds from sale proceeds generate interest income, while return on capital employed (ROCE) may improve by 250-300 basis points as low ROCE business is knocked off from the balance sheet,” Gupta and Tholiya from Emkay wrote in the note.
The move to divest also fits well with the larger Tata group strategy to exit less profitable or loss-making businesses. For instance, group company Tata Steel is also on the lookout to find a buyer or joint venture partner for its steel making facilities in Europe in a bid to cut mounting losses.
However, Tata Chemicals may find it difficult to divest from its residual fertiliser business. “We think it might be more challenging to find buyers for the non-urea part of TCL’s fertiliser operations, considering its inferior financial profile relative to urea, which is reflected in its wafer-thin margins and minimal earnings,” analysts Abhijit Akella and Nikunj Gala wrote in an India Infoline Research note on August 11. “Unlike urea, the phosphate business is not backward-integrated to the fullest, and this would dissuade foreign buyers,” they added in the note.
The Tata Chemicals spokesperson refused to comment.