Cashing in on ash

To acquire scale, Tata Chemicals and GHCL go shopping for foreign soda ash majors

Soda ash is not a business one associates with global acquisitions, but with two major buys within a fortnight, there is sudden activity in the sector.

GHCL announced its acquisition of a 65 per cent stake in SC Bega Upsom in Romania for $19.5 million, and a public offer to acquire the balance 35 per cent. On November 24, Tata Chemicals had announced its acquisition of a controlling stake in Brunner Mond Group, UK.

Tata Chem and GHCL, India's top two soda ash manufacturers, are making use of their cash pile of $150 million and $80.5 million respectively, that they have raised through FCCBs recently. GHCL's Upsom acquisition will increase its capacity by 200,000 tpa immediately and another 100,000 tpa within 18 months.

At current capacity, its revenues are estimated and net profits are estimated at $35 million and $7 million. With a debt of $3 million, GHCL's price of acquisition is slightly less than one times sales. GHCL also plans to acquire another 250,000 tpa plant in Romania. With the Brunner Mond acquisition, Tata Chem will increase its capacity by 16 lakh tpa and acquire manufacturing presence in the UK, the Netherlands and Kenya. Tata Chem is yet to disclose the financial details of its deal.

Undoubtedly, soda ash is a commodity business, but the demand side is strong at present, with firm prices thanks to demand from glass, detergents and cement industries. The acquisition route is a good option for both companies as they will gain scale.

New capacities will take time to come up and are also expensive. In India, a decent size acquisition is not possible as capacities are small, except for Nirma, which uses soda ash as a raw material in detergents.

Foreign acquisitions will also help both companies gain access to ready markets and manage transportation costs better. Thus far, Indian companies have not been major buyers of commodity businesses abroad, but since equity has become a cheap source of funding today, there can be more such deals.

Pantaloon Retail: Losing momentum

Pantaloon Retail has reported a lacklustre growth in its November sales - same-store value retailing (from Big Bazaar and Food Bazaar) fell 0.82 per cent y-o-y and lifestyle retailing (under the Pantaloon Brand), too, slipped 3.38 per cent.

Sluggish sales growth for the company in the previous month is attributed to the shift in Diwali this year to the first few days of November compared with mid-November last year. Hence the traditional pick-up in spending this year was witnessed in October sales.

Pantaloon's high-margin same-store lifestyle retailing showed a growth of 45.83 per cent y-o-y in October 2005, whereas this pick-up in sales was felt in November 2004. The stock rose about 0.2 per cent to Rs 1750 on Wednesday.

Prior to today's gains, the stock has run up almost 36.5 per cent over the past six months. However, the key growth continues to be the low-margin value-retailing business. This segment's same-store sales expanded 25.91 per cent y-o-y between July-November 05 as compared to an 18.26 per cent growth in the lifestyle segment.

This expansion of the low margin business resulted in operating margins falling 137 basis points on a y-o-y basis to 7.66 per cent in the September 2005 quarter.

As a result, investors have shown signs of tempering their optimism for this sector "" this stock has gained about 2.1 per cent over the past three months as compared to an 11.9 per cent gain in the broader market.

The management is confident that the ongoing expansion would help improve margins. Meanwhile, the street appears to have factored in the growth opportunities with the stock trading at about 56.5 times estimated 2005-06 earnings.