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The second quarter revenue numbers indicate that conditions for the fertiliser and soda ash business continue to be tough…

The fall in the second quarter was primarily because of high prices and huge volumes in phosphatic fertilisers (DAP) in the year-ago quarter, which were not visible in the second quarter of the current fiscal. In fact, we had stated in Q2FY09 that the robust performance was unlikely to be repeated, given that the price run-up was out of context and would return to normalcy soon. In our view, the return to normalcy has begun.

In the case of soda ash, the problematic quarters were Q3 and Q4 of the last financial year when volumes fell and utilisation rates dropped to 75 to 80 per cent level. However, in the first quarter of the current fiscal, utilisation rates have improved to 85 per cent and in the second quarter we are almost back at full capacity across geographies, partly also because we shut down our Netherlands plant.

The soda ash market has bounced back and is a reflection of: first, a strong growth momentum being maintained in Asian markets and second, we are seeing furnaces and plants reopening in the US and in Europe. Now the fear is how much of the bounce back is due to the stimulus and how much of it is from real demand? Assuming that, across the world, exit policies are done in a measured manner, there are reasons to believe that the growth will continue, albeit slowly. The real question is how much of that would impact Tata Chemicals? I think about 35 per cent of our business is dependent on the sectors impacted by the chemicals business, which is only 50 per cent of our total bottom line. So even if the 35 per cent halves, the overall loss for the company will be just around 8 per cent. But this is purely in regard to volumes, as we have benefited largely from lower raw material cost in the first half of the current fiscal. Going forward, input costs are unlikely to fall further and, hence, we need to focus on efficiencies and managing costs.

So what measures are you taking to maintain your margins in this scenario?

We have been successfully running a focused efficiency and cash conservation programme called ADAPT for the last six months. The programme which was being pursued at the corporate level, has been extended down the line across operations and the benefits of this will continue to accrue during the year. Besides, certain new lines of operations will come into play, which would also help us offset some of the negatives. We will be very soon commissioning the Central Prayon Process in Haldia, which should give us the benefit of better yield and also aid gypsum sales to cement plants because the quality is acceptable. In addition, our European business will benefit as our mica plant has begun operations in the UK. Going forward, by June-July, we expect our customised fertiliser plant at Brunner Mond to be operational, the benefit of which will be felt in the first or second quarter of the next fiscal. So these initiatives will help us maintain the momentum.

Coming back to the soda ash business, how is demand revival panning out?

Within the US, I think the market has bottomed out. There is a slow improvement in the US every month, even as we are seeing growth momentum being maintained in the Latin American market. Also, because of the dollar position, we are becoming extremely competitive in other parts of the world, including the European market, and we do believe that the market share that US producers lost in Asian markets to Chinese producers is slowly being regained. Essentially, it’s about regaining market share in Asia and also gaining some foothold in the European markets.

How big a challenge is Chinese competition?

It remains a challenge as there is tremendous oversupply in China. They are continuing to sell at prices which, we believe, are unremunerative to them. If not profit, they are selling at a marginal loss. This will continue because the overcapacity situation is unlikely to even out in the short term. We will focus on doing what is right for us, that is, to not lose market share in Asia and protect our other markets as much as we can. The only thing that is going for us is our low-cost position and that will help us to make margins even at these prices.

What are these prices?

If you look at FOB prices coming out of China, they are at around $170-180 levels. That is roughly the price in various markets, depending upon where the freight is.

So do you see prices going up to 2007 levels?

For the situation to repeat itself, the demand-supply equation has to go back to the same level. We are not sure how global demand is going to revive and we believe it will take about 36 months for things to get back to normal. The problem began in 2008, so we should wait till 2011-2012 to sort of see the world getting back in shape. In my mind, 2010 will continue to be tough for most businesses. The only benefit for Tata Chemicals is its balanced portfolio of businesses, which have ensured exposure to markets not hampered by the credit squeeze. For example, our entire agri portfolio and consumer product sales have not been impacted at all. Besides, our European and Latin-American business too have not been impacted by the financial crisis.

Is your US soda ash capacity completely booked? How are the realisations?

Yes. We are running at full capacity today. Fundamentally, the US domestic market operates mostly on contracts. All I’d say is that at the prices we are running today, the margins are acceptable and something that we find worthy to pursue.

Why was the Netherlands business shut down?

The plant’s cost position was the biggest issue, so we had to take a strategic decision to close it down.

Pension liabilities (because of overseas acquisitions), which were earlier shown in P&L, are now being capitalised. Why?

I have a valid reason. If you look at the pension fund, they have exposure to equity and debt markets. The asset value of the fund varies with movement in the equity markets. Do you correct every quarter, is the issue that we had with this methodology, as it creates short-term fluctuations in interpreting the workings of a company related to an event that is outside the workings of a company. And if the fund is going to exist for the next 10-15 years, it does not make sense to factor in the short-term swings, both on the deficit and surplus sides. This doesn’t happen in India because we are only allowed to invest in debt securities. The moment the freedom is available to invest in equities, it will be reflected in market movement. So that’s the real issue in the pension fund.

Importantly, we are working within the legal framework and we have a trustee who advises us in managing the funds so that the company’s operations are not at risk.

So what is the total pension liability?

As on March 31, 2009, the pension liability stood at Rs 114 crore.

How is the agri distribution venture with Total panning out?

Kshet-Se is a unique business model. We started with one centre in Punjab as the state’s policies are more amenable to unique business models which involve fresh produce. We have had tremendous support both from the farm and retail communities, which include pushcart owners. Besides, we have done multiple export consignments with repeat orders to markets in Dubai, Ireland and Europe. We have used the centre for honing our skills to scale up the model and this doesn’t necessarily depend on opening more centres. We have scaled up our operations, right up to Delhi, from this one centre.

Testing times

Revenues fell owing to lower subsidies/trading and steep fall in fertiliser prices

Source: Company; MF Global

The most difficult part for us has not been about getting markets, but about working with farmers to improve their production practices. A lot of wastage depends on how the fruits/vegetables are plucked, how they are washed and cleaned at the farm level, and how they are stored and transported.

The second thing is, a branded product needs consistency in output. One cannot deliver consignments with different shapes and sizes. They have to be almost identical. This means one has to work very hard at the back-end with farmers to build the entire supply chain. We can build infrastructure fairly quickly, but we need to scale up our farm-side infrastructure as well. We are still working on it, given that the concept of looks and size was never an issue in India. But it is becoming an issue in retail stores and in exports. We believe that it is far better to perfect the business model in one centre than to expand operations for the sake of it.

What was the big idea behind converting Rallis from an associate company into a subsidiary?

It was about financial consolidation. We would have had the same operational synergies and the same operational benefits, even if it had remained an associate. But by becoming a subsidiary we can now take 100 per cent benefit of the profits and that really adds to the consolidated P&L and balance sheet.

What about the timing of the acquisition? What value did Tata Chemicals see at Rs 850, which was not visible when the stock was quoting at Rs 350 levels some time back?

I can only say that we followed the rules prescribed by Sebi for inter-sale transfer between two promoters, after the decision was taken by our board. And our board found the price at which we acquired those shares beneficial for the shareholders of Tata Chemicals. So fundamentally, if you ask whether that price was acceptable to Tata Chemicals? It was. We could ask, with respect to such acquisitions, why certain events didn’t happen three years or two years before. The fact is that we made a strategic case at a certain point of time.

I think, the fact that we have acquired the additional stake at such a price is an internal vote of confidence from the group, in that we believe that the company has excellent plans going forward.

From the perspective of Rallis itself, it now enjoys the support of a parent which is interested in growing the business and encouraging the management to grow even faster. So it’s a win-win situation for all.

Would you like to spin off the fertiliser business of Tata Chemicals and merge it with Rallis?

Tata Chemicals is present in three segments – farm essentials (fertilisers, pesticides and crop protection chemicals), industry essentials (soda ash and bicarbonate) and living essentials (salt and bicarbonate business). If you look at the characteristics of the company from a market perspective, fertilisers and soda ash are like commodity chemicals. They have nearly the same P/E multiples worldwide. Now we have to look at it in financial terms and not just operational terms. The crop protection business has P/E multiples which are very different. That’s one of the reasons we have decided not to merge and at the same time derive consolidation benefits. We will explore the possibility of putting up a common front to work in the farm community, as each company has built strong relationships through Tata Kisan Sansar (the physical retail network) and Rallis Kisan Kutumb (a farmer relationship programme). That’s something that I am sure the managements of both the companies will look at leveraging.

So at no point will you consider the option?

The common link at the end of the day is that we are chemical companies. We have a common resource base of chemical engineers, standards of safety, and common value system which binds us together. In certain businesses there are common customer issues, which are essentially between Rallis and our fertiliser business in terms of farmer linkage.

The distribution channel for crop protection is different from fertiliser companies. Besides, the operational regime too is different. Crop protection is a free market, unlike the subsidy-driven fertilisers business. So there are differences, because of which they cannot be put together so quickly.

We want to have the best of both worlds and this, in our view, is best achieved by financial consolidation and at the same time empowering and energising the unique identity of Rallis.

Can you talk about what is happening in the fertiliser business?

As far as urea is concerned, we run one of the best operations in India and we believe that the KG Basin gas find is an opportune time for India to completely restrict imports and meet its domestic needs through domestic supplies.

We also believe that fertiliser units are the right way to use the gas, because this not only gives thermal value, but we also get chemical value. Besides, from a carbon perspective it is much more environment friendly. In the wake of the new fertiliser policy we are actively looking at investments in the urea space.

Isn’t gas pricing an issue, given that the pricing is effectively only for five years and could make potential capacities unviable?

We believe that the pricing will be done in a fair and equitable manner. So we don’t see that as a big risk for the business. In any business, one manages the input variables versus output variables, and that is the risk we have to manage.

What kind of traction are you seeing in the salt business?

Salt is the heart of our business and we are extremely conscious of the fact that we reach out to maximum number of households in India. We have consistently been the top food brand in India and we have gone from strength to strength. Our market share between the two brands – Tata Salt and Iron Sakthi – in most markets is 58 per cent. It continues to grow among national brands and we believe that it has the potential to grow further.
In addition to the branded business, we are looking at new products such as bicarbonate cooking soda and other micro-nutrients for households.

So it will be an organically-led business model…

If we do extend our food space to beyond what we do, it will be on our own, because we not only have the front-end access, but also enjoy back-end linkages with farmers. We will keep examining possibilities and make our moves when the time is right.