There seems to be no relief for fertiliser companies as subsidy overhangs and delays in payments continue under the BJP-led government.
There seems to be no relief for fertiliser companies as subsidy overhangs and delays in payments continue under the BJP-led government. In an interview with FE’s Pranav Nambiar, Tata Chemicals CEO R Mukundan says delays in receiving subsidy have stretched further, straining the company’s cash flows and putting its working capital cycle under pressure. Mukundan says the company is making a strategic shift from being an industry essentials and chemicals company to one that is more consumer -oriented with a product portfolio of packaged food and nutrition products. A network of one million farmers called the Rallis Kissan Kutumba will aid these efforts. Edited excerpts:
Is there any respite from the delays in the release of fertiliser subsidies?
As far as urea is concerned, India has three issues—a shortage of domestic gas, unattractive government policy, huge subsidy overhang and delays in payments which has led to a lot of working capital pressure. Subsidy is normally paid in two months, but is now being paid over six months. So, on subsidies of Rs 2,000-2,500 crore, even at an 8% interest rate, it is about R160 crore of additional interest rates being borne by the company.
Commodity fertiliser is one area where we don’t see any competitive advantage in India. The business is not attractive enough to pump in additional investments. While everyone is aware of the ill effects of the low prices of urea, I think there has been little movement either by the previous government or this government.
Are you then making a strategic shift away from some of your traditionally strong business segments?
Our start was as an industry essentials and chemicals company and then we moved to farm essentials. We now see a huge opportunity in consumer foods business on the back of rapid urbanisation in India. We have decided to stick to products that we know well, which initially started with salts. We look at what farmers are producing, and the output of the farm feeds into our branded food business. The second line we have added is pulses and most recently we have added Tata Spices in Punjab. So clearlywe are going to add products in this segment.
This year our target was to achieve R250-300 crore revenues from the pulses business and we expect to grow 50-60% annually. India does not have a single brand of pulses or packaged pulses and we are creating a market where none exists. We continue to see other categories where similar work can be done. We have a product portfolio in the pipeline and this will be in the area of packaged food products and nutrition.
What is the size of the investments you are making in the food business? Will your food products be available in retail stores?
As I indicated, we are working with farmers, but these don’t appear as capital investments, but more like expenditures. So we invest in the farmer in terms of improving his standards of practices. For a typical category, the kind of market investments we would be making is R30-50 crore on an annual basis.
The expansion into retail outlets has been in a very measured way. We would be present by the end of this year in one lakh stores and the universe itself is one lakh stores in the minimum. Beyond that, the penetration can increase 6-7 times of that number over a period of time. Pulses, for example, is today available in about 1 lakh stores. The easiest entry is in the modern store format where they keep only packaged products. But the audience we are trying to address is both the modern retail store and the kirana store. Most companies have just scratched the surface, whether it be atta (wheat) or rice or dal (pulses).
The industrial chemicals segment has seen significant restructuring efforts over the last one year. What is the progress?
Our focus on the industrial chemicals is primarily soda ash and that is growing at the rate of 3-4% every year. A couple of years ago there were two forces in the soda ash markets—supply glut and high energy prices. This led to shutdowns in UK, Kenya, Portugal, Australia, all of which faced the same issue. So what has happened in the last couple of years is that a lot of supply has been taken out of the market because of the closure and the world market today is in a balance. China and Turkey could both ramp up supplies but this would take at least a couple of more years to fructify.
We had undertaken a painful restructuring process about a year ago and last year we declared the highest loss this company has recorded on account of restructuring in the UK and Kenya. In the last quarter Magadi in Kenya made profits. In Kenya we are making some capex of $7-8 million towards re-engineering on the ground. We have also committed that by September our UK operations will become profitable. We acquired a power plant about a year and a half ago as part of the restructuring exercise.
We do believe that we are linking the most exciting market, which is India, with the most with the most exciting supply source, which is the US and Kenya. Indonesia is also showing growth, China is beginning to falter a bit but is still a very high growth market. In addition to that we are also present in Africa which is also a fast-growing market. Six of the African countries that we are present in are clocking growth rates in excess of 6-8%.
Our investments made in the sodium bicarbonate markets have begun to pay dividends with the UK showing growth. We do export to Northern Europe as well as parts of Asia and Africa. We are also exploring if we can send the material to South America.
What will be the growth drivers for the business?
The growth engines for the company are going to be the agri business including agro chemicals and seeds and the consumer business. If we continue to track the market growth levels we will also grow in the chemicals business. All these businesses will continue to generate positive cash which will enable us to deleverage the balance sheet even more in the future. We have set an internal target of doubling the turnover every 5 years and we are on track to meet that.