Tata Chemicals is all set to cash in on the rising soda ash prices globally through its recent buyouts. In January this year, Tlita Chemicals bought the soda ash business of the US-based General Chemical Industrial Products (GCIP) for $1 billion, to become the world’s second- largest maker of soda ash. It seemed like a costly affair as the markets gave a thumbs down to the deal, with the stock tanking 7 per cent on the day of the announcement.
Today, soda ash prices are on the up- swing. The Indian wholesale price index for soda ash is up 35 per cent from August last year.
For Tata Chemicals there has also been a favorable twist in the regulatory environment for fertilisers, which contributes a significant share to the company’s revenues. Also, the company recently launched a new initiative in the rapidly expanding bio-fuels area that promises good returns.
Price push
The recent reduction in the production of soda ash in Europe and the US, due to environmental issues, has caused a supply shortage, pushing prices upward worldwide.
This multipurpose chemical is used in a variety of industries, most prominently in the manufacture of glass. It is also a major ingredient for making soaps and detergents.
Most of the demand for soda ash comes from China, West Asia, India and some other Asian markets, and this is expected to grow at 34 per cent annually. Soda ash being a mature commodity, demand generally grows in proportion to the population and the GDP growth of a country, which also explains why China and Asian countries are the biggest consumers.
The revenue from soda ash in FY09 is estimated at 49 per cent of Tata Chemical’s total revenues after consolidation of GCIP’s facilities, as against 36 per cent in FY08.
Of course, there are pressures from rising raw material and energy costs, but analysts believe this will not dent margins much. According to a report by Emkay Shares and Securities, the increase in soda ash prices have more than compensated for rising costs, leading to margin expansion for soda ash manufacturers.
General gains
Soda ash is manufactured by a synthetic process, or through purifying natural soda ash obtained from mines. The purification route is half as expensive as the synthetic process and therefore works as a natural hedge against the commodity cycle.
In the past year, raw material cost in the synthetic process has increased 68 per cent to $188/mt, primarily on account of higher coal and coke prices, while that in the natural soda ash process has increased 46 per cent to $96/ mt, mainly due to rising gas and coal prices. The Emkay report points out that in a rising input cost scenario, the advantage for natural soda ash manufacturers is higher in absolute terms. Against this background, the acquisition of General Chemical (Soda Ash) Partners (GCSAP), a subsidiary of GCIP has been extremely advantageous to Tata Chemicals. Firstly, it increased Tata Chemicals’ soda ash capacity to 5.5 million tonnes, the second largest after Belgian chemicals producer Solvay.
Secondly, and more significantly, it gave the company access to large natural soda ash reserves. General Chemical’s mining facilities are located in Green River Basin, Wyoming, the site of the world’s largest and most economically recoverable trona ore deposits that are convertible into natural soda ash. These reserves constitute half of GCSAP’s capacity.
Brunner boost
In December 2005, Tata Chemicals acquired a controffing stake of 63.5 per cent in the UK-based soda ash manufacturer Brunner Mond for Rs 508 crore. By August 2006, it acquired the remalning stake through an open offer. The acquisition boosted its natural soda ash capacity to 3 million tonnes then, and provided access to markets in Europe, Africa, Pakistan and the Asean region.
Brunner’s natural soda ash mining facility in Kenya is only second in size to General Chemical’s mines. There are two plants in Kenya, the older one producing natural standard ash and a new one for pure ash. Political disruptions delayed commissioning of the pure ash plant which was running at a 55-60 per cent capacity in FY08. The new plant is switching from fuel oil to solid fuel to offset the effect of rising energy cost that has depressed margins, while also ramping up capacity utilization.
With the two acquisitions, natural soda ash now constitutes 58 per cent of the company’s total soda ash capacity, up from 12 per cent in 2007.
Fertiliser growth
Fertifiser is the other major segment for Tata Chemicals. The company has an installed capacity of 8,64,000 tonnes of urea at its fertilisers complex in Babrala, in the Badaun district of Uttar Pradesh. This constitutes nearly 12 per cent of the urea produced by the private sector in the country.
Fertilisers, including the nitrogenous (urea), phosphatic (DAP) and potassic (MOP) types, contributed about 40 per cent of the company’s revenues in
FY08.
In June, the government announced import parity pricing for phosphatic fertifisers like DAP Also, Tata Chemicals saw a 33 per cent increase in urea sales volume and a 29 per cent increase in DAP and NPK sales volume due to improved production and market conditions.
The seasonality effect, where the company sold a lot of stock that was manufactured in the previous quarter; as well as lower raw material prices, saw an expansion in fertiliser segment margins from 13 per cent to
20 per cent in the April-June quarter.
The management has tioned that though creased profitability continue through due to the policy the extent of expansion this ter was a time occurrence.
The other good news for the company was the new urea pricing policy announced in August. Under the earlier poiicy, the government would buy urea from manufacturers at cost plus a fixed profit (about 12 per cent post tax) - a mechanism that is be-lieved to have incentivised inefficiency, as a higher cost of production would ensure a higher price. Under the new policy, the government will pay an import parity price (IPP) or a price linked to international fertiliser prices. The IPP has been fixed at 85 per cent of import price for revamped manufacturing units, in a price band of $250425 a tonne. For expanded capacities, IPP is at 90 per cent.
This pricing mechanism will directly benefit Tata Chemicals’ Babrala brown- field expansion which alms to increase capacity by 25 per cent to 1.2 mfflion mt. Global prices of urea are at around $800 a tonne today, while local cost of production is around Rs 13,000 a tonne, making for a significant difference in urea pricing, post the policy.
“The new fertiiser policy will encourage efficiency in the fertiliser industry and we are poised to take advantage of that,” says Khusrokhan.
A big concern for fertilisers, however, is rising input costs, specifically sulphur and phosphoric acid. “The joint venture with Moroccan phosphoric acid producer IMACID addresses the problem of rising input costs to some extent, by assuring phosphoric acid supply,” says Kumar of Karvy
Bio-fuel venture
Apart from its major soda ash and fertillser businesses, Thta Chemicals has several small businesses like cement, heavy chemicals including caustic soda, sodium bicarbonate and chlorine, pharmaceuticals including bromides, sodium, potassium and ethyl, and it is a market leader in the domestic edible salt market, holding a 53.1 per cent share with its brands, Thta Salt (43.4 per cent) and the newly launched I-Shakti (9.7 percent). About 5 per cent of its revenues are from edible salt.
As part of its package to help farmers increase yields, the company has launched new initiatives. The Khet Se (FThom the farm) initiative offers services like soil-testing, advice, facilitation of crop loans and insurance through its 600-plus Thta Kisan Sansar outlets. It plans to set up 30 centres over the next three years that will need an investment of Rs 10-20 crore each, depending on their size. In an important new business initiative in the bio-fuels area, the company has set up a pilot plant with a capacity of 30,000 litres a day, at a cost of Rs 50 crore, in Nanded, Maharashtra. It is expected that sorghum, which is to be used as feedstock in the process, will make bio-fuel competitive even if crude oil falls to $65/barrel. Based on its success, capacity will be scaled up to 100,000 litres a day.
Expansion plans
In June, the company announced plans to investabout Rs 500 crore this financial year to increase production in the major businesses. This includes about Rs 200 crore for de-bottlenecking measures at the Babrala fertiliser plant, a smaller capex at the phosphatic fertiliser unit at Haldia in West Bengal, and Rs 200 crore at the Mithapur soda ash facifity. The outlook for the GCSAP acquisition being positive, building on the Brunner Mond experience, analysts see a strong 35 per cent CAGR growth in operating income to FY10.
At a PE of 12x its FY09 earnings estimates, the stock looks attractive. The share price of this chemicals and fertiliser maker now trades at Rs 315 levels, coming off a 52-week high of Rs 440 at the end of May.
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