The over Rs 12,300-crore salt-to-soda ash Tata Chemicals is on the cusp of a business transformation. While the traditional chemicals and farm essentials business remains the group?s mainstay, the living essentials part?comprising packaged salt and fresh farm products for households?is poised for a bigger leap. Post-recession, a prudent mix of structural realignment and cost control, along with economic revival in most markets, has stabilised its soda ash business, while a rising domestic market is driving sales of its consumer products. In an exclusive interview with MG Arun , Tata Chemicals? managing director R Mukundan talks about the changing face of the company, the survival lessons from the slowdown, and the scope of its new businesses. Excerpts:
The global slowdown had hit you in FY09, with the net profit plunging more than 30%. How has the ensuing period been? Are you seeing a revival of demand?
At the start of the credit crisis in September 2008, we anticipated an 18-month period of difficulties. We came out with a programme called ADAPT, focused on issues related to cash, cost, capital, communications, and so on. This has yielded handsome results. Our operations are now back to normal. We have also taken painful decisions, including closure of the Netherlands plant. During this entire period, the Indian operations did exceedingly well, and continue to do so. India continues to be beacon among all the markets we operate in, in terms of momentum.
We went for a structural shift in our operations. We have brought down our effective capacity by 350,000 tonne for soda ash, which has pushed up plant capacity utilisation. For General Chemical Industrial Products (the US company acquired in 2008), we decided to push far more aggressively into newer markets and we have a 100% capacity utilisation there. We also used the output of that plant to produce relatively recession-proof products like sodium bicarbonate. We have also invested more in IT, communications and infrastructure, which has effectively reduced the need for co-ordination and physical travel and has resulted in an efficient corporate structure.
What drove you to close down the Netherlands plant? What about growth in other markets?
We realised that the cost position of that plant was weak, and that we would be much better off without those operations. We have an extremely low-cost position in the US, India, the UK and in Kenya. The challenges we had were mostly due to the Haldia operations, both internal and external. We continue to have issues with the cost structure of the plant in Magadi. We are trying to address that.
None of the markets are displaying any downward trend. The US has gone through its own process of restructuring much more rapidly than the other markets. Europe still has some way to go. However, we are extremely watchful. Governments still have to go through a period of tightening. What impact this will have on demand, employment and general credit availability is still in question. We have averted a crisis, but we cannot declare that things are back to where they were before. We have reached something like a ?new normal?. In India, the demand has been growing for different products between 6% and 15%. Bicarbonate, for example, is growing at 15%, soda ash is growing at 6% or 7%, and so are urea and DAPP.
Is this demand real, or is it riding on the back of government stimulus programmes?
We do believe that the demand in Asia is real. The real question is about the employment figures. The consumption-driven demand will pick up only if the employment figures show a slight upward trend.
Since the demand is back, we are fully sold out in all our operations. But cost is a problem, since commodity prices are impacting all our operations. A year ago, we had a headwind of demand and a tailwind of margins. Our margins were expanding because our input costs were coming down. This year, we have a tailwind of demand, but a headwind of margins.
Could you please elaborate on the impact of rising commodity prices on your business?
Except for gas prices in the US, which had actually fallen, coal, coke, transportation costs, ocean freights, all have hardened. So, the net delivered cost to the customer is increasing today. Many commodities that go into the agriculture side, like sulphur and rock phosphate, have seen a price hike. Except for the urea business that is using domestic gas and has remained flat in the entire period, anything which is exposed to international commodity prices has shown a pressure on margins because of increased costs.
But companies such as yours have reacted with a hike in your product prices?
The increase in prices we effected does not reflect the full increase in costs. We have tried to absorb some of the increases ourselves. When demand increases, if capacities do not come on stream, supply constraints will take price up. When the price increases, it becomes profitable for suppliers to put investment back. When there is growth, you need investment to feed the supply. Somewhere, the margin has to be earned by the supplier. If we hold on to prices aggressively, it could lead to price spikes later on.
How has the appreciation of the rupee affected your business?
Appreciation of the rupee vis-?-vis the dollar is itself not a big problem for us. The relative stability of the Chinese yuan against the dollar, vis-?-vis rupee appreciation is a larger issue. The Chinese are our competitors. With the appreciation of the rupee, all the protection that the government was planning to give has gone away, because the yuan has remained constant. The currency helps the Chinese, they get a 9% extra credit. These are all softer ways by which the government is helping them. A 15% currency protection, plus 9% is a 24% benefit. How does one fight a 24% benefit, when the margins in this business are wafer thin? Hopefully, we will see some positives steps from the government in this direction. In the chemicals business, while 0.8 million tonnes is in India, we have got four times the capacity outside India. There, the pressure of rupee appreciation naturally plays to our favour.
What sort of push are you planning for your major businesses, now that the economic conditions are looking up?
We are investing in all our businesses now, be it chemicals, fertilisers or consumer products. In chemicals, we are de-bottlenecking our current operations across the globe. In the salt business, we will increase capacity by almost 50% to cater to the future demand for packaged salt. In the fertiliser business, we have finished de-bottlenecking and are investing in customised fertilisers. We are examining growth options in complex fertilisers. We have acquired Rallis, which was part of our strategy to extend ourselves into the farm space.
You have surprised the water purifier market with the low-cost product, Swach. What has been its acceptance level? Are there plans to ramp up capacity?
The response has been very good. We pushed back the launch in Karnataka by around 20 days because the response from Maharashtra itself was high. In fact, it was much higher than what we had anticipated. We are already in two states, and now we are ramping up production to enter the third state, which could be West Bengal or one of the states in northern India. We are going to hit the whole Hindi speaking belt as one market. We should cover most states in the country by the middle of this year.
Our target for Swach remains a million units a year. We have built a capacity for two million. Right now, we are in the process of augmenting it.
How important is the fresh agriculture business in the overall structure of Tata Chemicals?
In agri-produce, we have decided to focus on a few fresh fruit and vegetables, and are initially launching the project near Ludhiana. We are still perfecting the business model. By the end of this year, we would have perfected the model.