The Hindu Business Line : Slower capex prudent move for Tata Chem

Tata Chemicals’ decision to put on hold the planned capacity addition at its Gujarat soda ash facility (from 9.75 lakh to 12 lakh tonnes per annum) appears a prudent move in the current economic context.

The soda ash market has remained relatively tight during the recent commodity meltdown, with producers still being able to negotiate long-term contracts at higher prices. But worries about surplus inventories in China — a key consumer in Asia — do remain a risk to prices in this region.

The addition of new capacities in India by Tata Chemicals at this juncture may leave it more open to the risk of a weakening market or prices in this region.

Should demand continue to grow at a robust pace, the company has room to increase capacity utilisation at its acquired facilities at Magadi and Wyoming.

Being based on natural soda ash, the acquired facilities are also likely to enjoy a lower cost structure than the Mithapur facility, which takes the synthetic route. The move may also help conserve cash and pay down debt.

Loan uncertainty removed

Besides this, the successful refinancing of a $350-million bridge loan taken to fund the acquisition of General Chemical Industries also removes a key near-term uncertainty for Tata Chemicals, given that the loan was falling due shortly.

This loan has now been refinanced through a 6-year LIBOR-linked loan of $300 million to be taken by the subsidiary, without recourse to Tata Chemicals.

A repayment of $50 million is planned from Tata Chemicals’ internal resources. Though the actual interest rates for the loan have not been disclosed, that the transaction has been clinched in a tight liquidity environment is in itself a comfort factor.

The rate of interest on the loan is said to be based on a spread over LIBOR that is pegged to Tata Chemicals’ net debt/EBIDTA ratio, which suggests that the rates may improve as the company draws down its debt and scales up operating profits.

Given the company’s strong operating cash flows, ability to scale up volumes and a reasonable demand outlook for both its businesses, an improvement in the above ratio seems quite likely over a two-three year period.

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