Merging To Get The Right Chemistry

Updated: Jan 25 2003, 05:30am hrs
The imminent merger of Hindustan Lever Chemicals Ltd (HLCL) with Tata group chemicals major Tata Chemicals is the first big deal of 2003. The decision of the two companies to consolidate under the single entity of Tata Chemicals has rightly been greeted with considerable cheer in corporate and analyst circles. Rightly, because the merger has been sought to be undertaken for all the right reasons, for both sides.

From the Hindustan Lever viewpoint, there are some obvious pluses this merger will bring. HLL, which has already made its policy of focusing on core competencies clear, can, after the merger is completed, concentrate on its power brands strategy for consolidation and future growth.

Whether it is the seeds business or fragrance/flavours or animal foods, the HLL strategy is to move out of non-core activities either through joint ventures or outright divestments. In the HLCL case, however, the situation is slightly different, owing to the fact that 90 per cent of HLLs requirement of sodium tripolyphosphate (STPP) an important raw material for detergents is sourced from HLCL. By retaining a stake in the merged entity, rather than selling it off outright, HLL will ensure it retains some say in the company since this critical raw material is supplied by it.

From Tata Chemicals point of view, the merger is a perfect fit. The Tata group clearly sees the chemicals and fertilisers business as a key business area for it and the merger will give the company several advantages. Chief among them is the geographical reach which HLCL will bring to the table. With Tata Chem strong in Uttar Pradesh and Haryana, the HLCL side will bring it key markets like Bihar and West Bengal.

Besides, the consolidation of the two entities will also ensure Tata Chem enhances its portfolio of fertiliser products from its present dominance in urea. During 1999, HLCL had successfully commissioned new plants of sulphuric acid, single super phosphate (SSP), and di-ammonium phosphate (DAP) in record time and within the budgeted capital expenditure. HLCL also extended its distribution reach to Punjab, Haryana and Rajasthan apart from strengthening distribution in traditional markets. In 2000, it successfully stabilised the sulphuric acid, SSP and DAP plant.

To its credit, HLCL was also able to meet the challenges of rising costs and stagnant demand by aggressive cost engineering and pricing to sustain its market share in a competitive environment. For Tata Chem, these would be readymade advantages which it will be able to draw upon.

Tata Chem, on the other hand, is one of Indias leading manufacturers of inorganic chemicals and fertilisers. The company owns and operates the largest and most integrated inorganic chemical complex in the country. The chemicals complex is in Mithapur, Gujarat and the fertiliser division in Babrala, Uttar Pradesh. Tata Chem started out by setting up a chemicals plant in Gujarat, which has since grown into a chemicals behemoth with an installed capacity of 8.75 lakh tonnes of soda ash per annum, about 42 per cent of the countrys capacity, making it one of the largest producers of synthetic soda ash in the world. The company also operates a salt works spread over 60 square kilometres, capable of generating over two million tonnes of solar salt, the starting raw material for almost all the 27 basic chemicals that it produces. It is from Mithapur that Tata Chem also pioneered the production of vacuum-evaporated, iodised salt, which now goes under the popular Tata Salt brand name.

The Tata Chem fertiliser complex manufactures urea, a widely used chemical fertiliser, and has an installed capacity of 7,42,500 tonne per year, which constitutes 12 per cent of the total urea produced by the countrys private sector. It also houses an ammonia plant with a 1,350 tpd capacity. Among Tata Chems clear agenda items for the future is to consolidate core businesses and increase shareholder value, and this is where the HLCL merger with it fits in perfectly.

With a major national presence in the fertiliser and chemicals business after the merger, the Tata Chemicals balance sheet will be substantially strengthened, and would serve to bolster its chances if the company were to go ahead and bid during the disinvestment of National Fertilisers Ltd.

Important enough is also the issue that the two groups the Tatas and Lever have traditionally been comfortable with mergers or acquisitions among themselves.

This is also another reason why the stockmarkets and analysts are comfortable with this merger, since the cultural fit between the two sides will also ensure that the consolidation goes off without hiccups. For India Inc., the merger is yet another signal that in the increasingly competitive business environment, it is imperative to consolidate in order to grow. Corporate India is learning that sticking to its knitting is the surest recipe for success.