The Hindu Business Line : Tata Chemicals acquisition timed well

Tata Chemicals’ acquisition of a 100 per cent equity stake in General Chemical Industrial Products (GCIP), a US-based soda ash maker, will endow it with substantial global scale and manufacturing cost advantages in its soda ash business.

The acquisition is timely; demand and price trends for soda ash are at a new high globally. Acquired capacities will help the company to quickly capitalise on these trends, without the gestation period that would be involved in putting up greenfield capacities.

Profit Margins

This acquisition, once it begins to contribute to the company’s revenue mix, will also further tilt its business mix in favour of its chemicals business, which currently offers better profit margins and growth prospects, relative to the regulated fertiliser business.

GCIP’s natural soda ash facility in Wyoming, USA, will add about 2.5 million tonnes (mt) to Tata Chemicals’ existing capacities of 2.9 mt spread over its units at Mithapur, Norwich (UK), Netherlands and Lake Magadi.

The scaling up of capacities comes at a time when the global soda ash cycle is displaying considerable strength, with construction activity in Asia spurring strong demand, production failing to keep pace and China curtailing exports of the chemical in order to meet domestic requirements.

Global soda ash prices currently hover at a high of $300 a tonne, having risen by 20 per cent over the quarter. Strong realisations apart, this acquisition also brings significant cost advantages in play for Tata Chemicals.

Significant Improvement

The added capacities will ensure that over half of the company’s facilities will be using the natural route; manufacture of soda ash through the natural route carries significant cost advantages over the synthetic route.

This suggests a significant improvement in the margin profile of the chemicals business, once production from its existing Kenyan facilities scale up and the acquired capacities too begin to contribute.

The funding of this $1.005 billion acquisition will be the only point to watch for investors in the Tata Chemicals’ stock. Tata Chemicals, which had debt of over Rs 2,000 crore in its books as of end-September, pursuant to its earlier Brunner Mond purchase, has recently restructured its debt to reduce servicing costs.

However, a very comfortable interest cover combined with strong cash coffers and proceeds from a recent FCCB offer all offer comfort on this score.

Tata Chemicals also has room to unlock value from its investment book which features sizeable equity stakes in leading Tata group companies; quoted investments alone are estimated to be worth Rs 1,600-1,700 crore at current market prices.