Rise and fall of Tata Chemicals

A. Srikanth

THE once unimaginable has actually happened.

It is, indeed, painful to read how the distressed shareholders of Tata Chemicals forced the management to conduct a poll to pass the company's 1999-2000 annual accounts. This is perhaps the first time in the history of Tata Chemicals that the company's annual accounts were not passed at the AGM.

The shareholders were quite distressed by the fact that the share price, now Rs. 38, was at a steep discount to even the book value (leave alone the replacement cost). Alas, what a fall for the company, once the bluest of bluechips in the corporate sector. The distress and the anguish of the shareholders is quite understandable. A brief look at the financial and stock market performance of Tata Chemicals in the last five years would tell the story.

The turnover grew a meagre 0.09 per cent per annum over the last four years -- from Rs. 1,515.37 crores in 1995-96 to Rs. 1,521.01 crores in 1999-2000. This is in stark contrast to the growth rate in turnover of 44.40 per cent per annum in the four-year period between 1991-92 and 1995-96. Similarly, the post-tax earnings fell 22 per cent per annum over the last four years from Rs. 394.56 crores in 1995-96 to Rs. 152.95 crores in 1999-2000. On the other hand, the post-tax earnings grew 60 per cent per annum in the four-year period between 1991-92 and 1995-96.

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The steep declines in operating profit margins (50 per cent to 29.75 per cent in the last four years) almost nullified the benefits from a gradual reduction in financial leverage and, consequently, lower interest cost. As the net profit margins fell from 26 per cent in 1995-96 to just 7.70 per cent in 1999-2000, the return on net worth too fell steeply from 33.50 per cent to around 10 per cent.

The decline in share price over the years is the ultimate indicator of the company's financial performance. Falling from Rs. 303 in August 1994 to the current Rs. 38, the stock has underperformed the Sensex in all the years. The extent of underperformance has been particularly steep over the last three years.

The reason for such a steep deterioration in the financial and stock market performance is not far to seek. For one, all the company's business have become highly uncompetitive over the years. Despite being the largest soda ash manufacturer, the company has suffered from sluggish domestic demand and excess supply; increasing international price pressures; and dumping from China and the US. With declining capacity utilisation and growing competition, Tata Chemicals has been losing market share in the recent years.

The company was caught on the wrong foot as the global commodity chemicals business restructured drastically over the last four years. Similar was the case with caustic soda, too. Excess supply over demand, increasing imports and international price pressures resulted in lower capacity utilisations.

The foray into fertilisers, which exposed the company to the vagaries of official policy changes and regulations, greatly increased the company's overall risk profile. The undue delay in fixing the retention price since 1996-97 has had an adverse impact on the cash flows. Even otherwise, the fixed cost of the company (more due to a relatively new plant) is left with a lower margin base (the difference between the cost of production and the retention price).

Some of the recent developments appear to have aggravated the situation. For one, the company faced lower capacity utilisation during 1998-99, which further reduced the margin base. Two, after the revision in the capacity rating of the urea plant, the provisional retention pricing was reduced by Rs. 462 per tonne. While these developments could have adversely impacted profitability, the government's attitude towards lower subsidy levels gives cause for further uncertainty

The company's foray into cement has also not paid off. In an industry that is consolidating fast, the company has neither scale nor distribution and market reach. Moreover, it caters to the Gujarat market, where production capacity is almost twice the existing demand. The company's vacuum salt business has been the only saving grace. But even this business has face pricing pressures of late, with the entry of newer brands.

On the whole, it appears that it is not only conglomerate discount that has gone against the company. Conglomerate discount emerges from the argument that the sum of the parts is more than the whole, due to asynergies between totally unrelated businesses (which is the reverse for a related business merger). In Tata Chemicals, the individual parts themselves have become uncompetitive, to the extent that the company is now just a sum of the parts. Consequently, pure hive-offs or demergers may not add much value to the shareholders of Tata Chemicals, as these business are themselves unattractive. What is needed is a total revamp.

Though the fertilisers business currently accounts for more than half the total turnover, the company has a dominating position in soda ash. Deciding on the future focus area is crucial, though difficult. Given the state of affairs, if Tata Chemicals wants to regain its past glory, it may have to opt out of chemicals and fertilisers, as both businesses are equally unattractive.

In this context one cannot but recall the fate of Harold Geneen's ITT, the US conglomerate. Originally International Telephone and Telegraph (ITT), the company diversified into unrelated businesses. However, in the 1970s, the company suffered severe erosion in earnings; share prices dropped from $67 in 1971 to $12 in 1974. The subsequent restructuring resulted in sale of various businesses to the tune of $4 billions between 1979 and 1986. ITT literally disintegrated as competitors pinched off parts from the company. What was finally left of ITT was just leisure and gaming. Does Tata Chemicals have anything to learn from the ITT experience?