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Finding The Right Chemistry
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Today, his company is the second-largest producer of soda ash in the world, and the largest seller of edible salt in India. It is also the world's fourth-largest producer of sodium bicarbonate (used in frothy drinks and baking powder). Its most popular brands, of course, are Tata Salt, the Swach water purifier and i-Shakti dal.
In the past seven years, TCL made several small and large acquisitions, the largest being the buyout of General Chemical Industrial Products for $1 billion. With operations in four continents, TCL's consolidated revenues were Rs 10,895 crore in FY11, with a net profit of Rs 653 crore. It has grown at a compounded annual rate of about 20 per cent in the past nine years.
Impressive though that has been, the acquisitions and expansions have increased TCL's overall, consolidated debt. It is now over Rs 5,700 crore, as on 31 March 2011. The overseas buys are yet to deliver big returns. About 60 per cent of revenues are still from India. TCL's standalone business accounted for Rs 6,332 crore of the Rs 10,895-crore FY11 revenues. Asia contributes 70 per cent of the sales. High input costs (coal and limestone) are squeezing margins. Diversifications into water purifiers, pulses and vegetables have not yet generated high-volume sales. Contributions from salt and other consumer products were just Rs 772 crore.
Given TCL's different businesses, making the whole greater than the sum of its parts poses some big management challenges. Second, putting together a strategy that will drive growth by getting each business to reinforce the others will take up a lot of attention. And, finally, creating a global brand identity from a slew of commodities businesses that will reflect the vision for TCL will be tough. None of those challenges is trivial. So, how does TCL plan to go about it?
Until the start of this decade, 72-year-old TCL focused only on India. Its core businesses were salt, soda ash and fertiliser. In spite of its leadership in soda ash and salt, and having the country's largest integrated chemical plant at Mithapur, Gujarat, growth has been sluggish. In FY02, TCL's income from operations was Rs 1,481 crore, lower than the Rs 1,502 crore in FY01. Net profit was also lower at Rs 127 crore, from Rs 165 crore. The future did not look too promising.
TCL sought the help of consultancy firm McKinsey & Co on ways to become a sustainable and the lowest-cost producer of soda ash in the world. McKinsey asked TCL to buy upstream assets with access to the raw material, which formed 56 per cent of consolidated expenditure in FY11, and to tap opportunities in global markets (distribution accounts for another 12 per cent).
In 2003, the leadership under the then managing director Prasad R. Menon restructured TCL into three strategic units: chemicals, fertilisers and food additives. The next step was acquisitions, beginning with the merger of Hindustan Lever Chemicals (HLCL) in 2004. That was a natural strategic fit. TCL was a leading urea manufacturer, while HLCL made other fertilisers under its Paras brand. A year later, TCL made its first overseas buy: 33.33 per cent stake in Indo Maroc Phosphore, Morocco for $38 million. Then, India was importing almost half of the world's production of phosphoric acid, and Morocco accounted for over 40 per cent of the global phosphoric acid output. More acquisitions followed, creating assets in the US, Europe and Africa.
The Ash Way
At present, TCL is a combination of three different, seemingly related businesses along a value chain. They broadly fall under two buckets. One being a commodity business such as soda ash, industrial salt and fertilisers, where owning upstream assets creates value. And the other being brand- and distribution-driven businesses such as consumer products (salt, pulses and water purifiers) and farm products where deep distribution network and brand equity with Indian consumers play key role.
TCL groups the three businesses under what it calls LIFE: living, industry and farm essentials. "We have separate leadership teams and sales channels for these," says Mukundan. "In some areas, we use synergies between one or the other to reach the consumer." The management led by Mukundan and executive director and CFO P.K. Ghose is aware of the challenges but is optimistic. "In the next 3-4 years, we will reduce about 50 per cent of the current standalone debt of Rs 2,900 crore," says Ghose. Mukundan, who took charge as MD in December 2008, says the new initiatives will be a big revenue earner. But for now, the emphasis is on scale, reach and distribution built in each business and leveraging them.
|"Our products reach 70 million houses every month" says Ashvini Hiran COO, consumer products, Tata Chemicals||"In four years, we'll cut standalone debt to Rs 1,200-1,500 crore" P.K. Ghose Chief financial officer, Tata Chemicals|
Soda ash, a key ingredient in glass, soaps, certain chemicals, pulp and paper, is the revenue mainstay for TCL. It contributed 38 per cent of revenues in 2010-11. TCL began soda ash production in 1944 at Mithapur, selling almost the entire production domestically. In December 2005, it bought 63.5 per cent shares for Rs 508 crore in UK-based Brunner Mond Group, which had manufacturing facilities in the UK, the Netherlands and Kenya. Three years later, it bought General Chemical Industrial Products, one of the largest soda ash producers in the US with 2.5 million tonne per annum (mtpa) of natural soda ash capacity. That took TCL's global capacity from around 3 million mtpa to over 5 million mtpa, and made TCL the second-largest soda ash producer in the world, behind Solvay, a Belgian firm, which has over 7.8 mtpa in capacity.
Mukundan says TCL will invest $100 million over three years in the US facility to expand capacity by another 400,000 tonne. The capacity in India will also increase by 100,000 tonne. The global soda ash market is about 63 million tonnes, growing at more than 5 per cent a year.
TCL's strategy to own the natural raw material source is paying off. "The cost of natural soda ash is $55-75 per tonne, where synthetic soda ash costs $180-200 per tonne. Our focus on natural soda ash mines has helped us become one of the low-cost producers," says Ghose. "TCL's plants are operating at 85 per cent utilisation and a healthy demand will make this go up to 90-95 per cent by FY13," says Manish Mahawar, an analyst with broking firm Prabhudas Lilladher. "But rising input costs continue to put pressure on soda ash business." TCL is also the world's fourth-largest player for sodium bicarbonate, commonly used as a drug ingredient, food additive and animal feed.
You might call it the fertilisers business, but TCL prefers to call it crop nutrition (in line with farm essentials). Urea and complex fertilisers account for 36 per cent of TCL's revenues, making it the second-largest business in the company. Most of the sales are in North India. "The government's decision last year to re-categorise fertiliser pricing under the nutrient-based subsidy (NBS) scheme (except for urea) will be good for manufacturers," says Ghose. "And there are plans to extend the NBS scheme to urea soon, too."
Securities analysts with B&K Securities concur. "TCL is set to benefit in the long run with the introduction of NBS in the urea sector, as it is one of the most efficient urea manufacturer in the country," note B&K's A. Rajkumar and G. Vijayaraghavan in their August 2011 report.
In fertilisers, strategic acquisitions play a part too. TCL bought 25 per cent of a urea fertiliser project in Gabon this April for $290 million. The NBS also allows TCL to experiment with customised fertilisers, establishing two plants at Rs 110 crore in West Bengal and Uttar Pradesh. A recent launch, Paras Farmoola, marks the firm's entry here.
But availability of gas has been a problem big enough for TCL to suspend plans of expanding urea capacity. But that has not stopped it from extending its portfolio; it owns 50 per cent of Rallis India, which makes farm inputs other than fertilisers — from seeds to agrochemicals.
Distribution is another strength. TCL operates retail outlets (it has 712 centres) under the Tata Kisan Sansar brand (Rallis has a similarly extensive chain). "Performance in the agriculture input business led by urea will be strong," notes Mahawar. But his report warns of input cost pressures and lower margins from non-urea businesses.
Speaking about non-urea businesses, TCL is test marketing its latest salt brand, Tata Salt Plus in Orissa, as a health enhancer. Developed in association with the National Institute for Nutrition, Hyderabad, the iron-fortified iodised salt claims to reduce chances of anaemia. "Given that every other child has iron deficiency, the product has huge potential," says Ashvini Hiran, COO, consumer products, TCL. "We hope to expand it in eastern India by March."
TCL brands enjoy huge brand equity and market share in the country. Tata Salt, i-Shakti and Tata Salt Lite account for 64 per cent of the branded salt market in India. Competitors — HUL (15.8), Nirma (13.3) and ITC (6.9) are way behind. That said, India's edible salt market is 5.5 million tonne annually, but branded salts account for just 1.3 million tonne. "Our products reach about 70 million houses every month through 1.6 million outlets. We plan to increase this to about 2 million outlets within the next 18 months," says Hiran. TCL will also increase capacity for salt from 600,000-800,000 tonnes.
|TATA, BUY BUY |
Tata Chemicals's big buys in recent years
• Merges with Hind Liver Chemicals 2005
• Acquires 33.33 per cent stake in Indo Maroc Phosphore (IMACID), Morocco
• Buys 64 per cent in Brunner Mond Group, UK, for Rs 508 crore
• Acquires General Chemical Industrial Products for $1 billion
• Buys 34 per cent in JOil, Singapore
• Acquires group company Rallis India
• Acquires South Africa's Grown Energy, which controls 95 per cent stake in a biofuel project in Mozambique
• Subsidiary Rallis India acquires 60.12 per cent in Metahelix Life Sciences
• Acquires UK-based British Salt through Brunner Mond for £93 million (Rs 650 crore)
• Buys 25 per cent in a urea fertiliser project at Gabon in Africa for Rs 1,284 crore
Its traditional businesses are doing well, but the new consumer businesses — food and water purifiers — are yet to create big ripples. TCL bets big on selling pulses grown with hybrid seeds and modern farming techniques. It launched four variants last year under i-Shakthi and aims to sell 300,000-400,000 tonne in a few years. This year, says Hiran, the target is 20,000 tonne. "India has an annual shortfall of about 4 million tonne pulses and we want to tap that," he says. But anti-hoarding laws of various states and fluctuating prices of pulses are affecting rapid roll out plans.
|Click here to view enlarged image|
Facing similar challenges is Tata Swach, launched with almost the same hype as Tata's small car Nano. Rural buyers are not flocking to TCL's 8,000-plus outlets to buy the water purifier. Hiran disagrees. "We have sold over 400,000 units since launch (in January 2010)," he says. "Our target is to reach a million units by 2012." Now, TCL plans to sell a third, and the cheapest model, purifier for villages.
Khet-Se, a joint venture of TCL and Total Produce of Ireland, to sell fresh vegetables, has not gained enough momentum, despite being a few years old. Its total revenue last year was just Rs 9.5 crore, and it is yet to break even. "We were a bit too far ahead of the curve (in launching the JV)," says Mukundan. Still, he is betting big on the investments made in bio-technology. In 2008, TCL had bought 33.8 per cent of JOil, a jatropha seedling firm in Singapore. The firm has a bioethanol test plant at Nanded, Maharashtra, and plans a sugarcane-based bioethanol plant in Mozambique. Rallis India recently bought 60 per cent in Metahelix Life Sciences, a research-led seed firm.
For Mukundan and his cohort, it is all about how science can touch people's lives: combining chemistry with physics and biotechnology. That sounds inspired, but a little fanciful, too. TCL will have to first better the performance of its acquired subsidiaries and scale up its consumer products businesses. Otherwise, they could end up being too far ahead of the curve — again.
(This story was published in Businessworld Issue Dated 07-11-2011)