TATA Chemicals’ strong results for the June 2010 quarter, although not repeatable, confirm the change in trend. The company, which was weighed down both operationally as well as financially by its overseas subsidiaries for the past couple of years, has turned the corner and is expected to resume its normal growth trajectory.
There were three main reasons behind Tata Chemical’s 408% profit spurt in the June 2010 quarter against the year-ago period. The company had written off Rs 87 crore in the June 2009 quarter towards closure of the Netherlands unit of Brunner Mond. That quarter, the company was also saddled with high-cost inventory that further pulled lower its margins, particularly in the fertiliser business. Thirdly, the company went on to acquire over 50% of the shares of sister concern Rallis India in November 2009 — the numbers of which are now included in the June 2010 quarter, but not in the June 2009 quarter. All these factors were one-time in nature.
The focus of the company, which in FY10 was mainly on slowing demand and falling prices, has now shifted to managing costs — particularly energy costs — to maintain margins. The company spent almost the entire FY10 on consolidating the acquired businesses, streamlining operations and strengthening balance sheet. It divested non-core investments and repaid debts to bring down its net debt to equity ratio from nearly 1 in June 2009 to 0.7 by end June 2010. It further arranged Rs 400-crore equity infusion from Tata Sons on a preferential basis.
Among the operational set-backs of last year, the company lost about 20 days of production in Brunner Mond, around eight days of operations in General Chemicals due to extreme cold weather and close to 60 days of production at Haldia due to industrial unrest.
Although the scenario was challenging, the company took upon several strategic decisions for future growth. Firstly, it raised its stake in Rallis India beyond 50% to make it a subsidiary. It also launched a domestic water purifier under the brand ‘Tata Swach’ as part of its consumer product portfolio, commissioned pilot plant for bio-ethanol and initiated process to set up 1.5 lakh tonne per annum speciality fertiliser unit in Babrala. The company is planning to set up another 10 such units in the next three years. It also readied its plans to double its urea capacity at a capex of Rs 4,000 crore, subject to firm allocation of natural gas. For the past two years, the company’s scrip has generated almost no returns for its shareholders — a scene which is likely to change. Since the company has streamlined its international businesses and is now present in both fertilisers and agrochemicals businesses, it can be considered a good proxy to bet on India’s agriculture sector.
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