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Delayed Subsidy Recovery Hampers Tata Chem

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The Rs 1,687-crore subsidy burden that Tata Chemicals has on its books, is going to impact its short-term growth plans and stagnation of its fertiliser production capacity at the present level. The outstanding subsidy amount has accrued over a period of two and half years, but the bulk of it is from February 2014. This huge outstanding is stressing the company’s working capital cycle and adversely impacting the interest costs, according to R Mukundan, managing director, Tata Chemicals Ltd (TCL).

The Rs 16,000-crore company has refocused its portfolio by expanding the non-subsidised products business -- specialty fertilisers and seeds and branded crop protection products -- after recovery from the government got delayed. This financial burden has accrued mainly due to the selling of urea at a subsidised rate to the farmers.

The higher gas price in India has also been forcing the company to produce fertilisers at thin margins. Sale of non-subsidised fertilisers, which accounts for 50 per cent currently, would overtake the share of subsidised fertiliser in the coming years.

“Difficulties in implementation of mobile-based fertiliser management system and outstanding freight payment have also added to the outstanding amount. Also, the subsidy levels are growing because of rising input costs coupled with stagnant selling prices,” says Mukundan.

Tata Chemicals had reported that its consolidated net profit had more than doubled to Rs 176 crore in the first quarter, due to last year’s lower base and better realisations across business segments this year. Sales were up 16 per cent at Rs 3,889 crore as against Rs 3,331 crore. It has a gross debt of Rs 8,371 crore.

As these subsidy levels grow, so does the likelihood of delays in disbursement, because of the strains that fertiliser subsidies impose on the government finances. The regularity with which subsidies are paid depends almost entirely on the government’s fiscal position.

“While we continue to maintain our sale of bulk fertilisers (which are subsidised), their relative importance to our bottom-line is diminishing with Tata Chemicals’ growing portfolio of branded products and the large addition of Rallis and Metahalix (both subsidiaries) turnover in this area.”

Mukundan adds, “Therefore, our focus is on inputs like speciality fertilisers, crop protection products and seeds...” Tata Kisan Sansar, Tata Chemical's’ retail network, has over 800 retail stores for non-subsidised fertiliser, seeds and pesticides. The business has grown to Rs 2,400 crore wherein the company has registered a growth of 22 per cent on a consolidated basis.

The shares of Tata Chemicals went up by 50 per cent in the last one year to Rs 370.75 on BSE as on August 22, 2014.

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