Tata Chemicals is all set to undergo a massive restructuring in FY18. CNBC-TV18 learns from sources the company will now completely shift its focus on chemicals and consumer products business.
The company plans to restructure parts of its international operations. It may exit operations in Kenya, and partly sell its volatile Europe and North American businesses.
It will exit from its fertiliser business in India and is actively scouting for investors for its Haldia plant.
The whole exercise is expected to bring down the debt of the company by 40 percent, which currently stands at around Rs 5,833 crore.
Post-restructuring, the company will focus on consumer businesses and launch products in the atta and rice segments in FY18. It is also reportedly looking at other products like wheat indigenous products and highly nutritious super foods.
Expressing his positive outlook on the likely change in the company’s business strategy, market expert Prakash Diwan of Altamount Capital Management told CNBC-TV18, “There is no point in setting up operations in so many places and you cannot manage this well.…Even if they sell it on a slump basis, if they sell it and get whatever they have invested, they will be very happy. I would be very happy as a shareholder to see that happen.”
Below is the transcript of Prakash Diwan’s interview to Nigel D’Souza and Kritika Saxena on CNBC-TV18.
Nigel: What are you making of this entire rejig? They are looking at focusing on more profitable business. They are exiting a couple of businesses and that is going to result in bringing the debt down by close to around 40 percent. How do you approach the stock from here and your analysis from this kind of an impact?
A: Let me put a very quick perspective to that whole restructuring exercise which is more like work in progress. It started off with, of course the urea business which they were finding extremely difficult in terms of competing with the PSU run urea producers because of obvious reasons that they have a very different cost structure and the efficiencies are not something that you get penalised for whereas the privately run businesses like Tata Chemicals would have to have a very different outlook towards it and they got out of it at a decent price.
Secondly, the seeding of the consumer business that Kritika was alluding started because the expertise they had in distribution, packaging, reaching out for Tata Salt which is one of the most common of staples that you use in the consumer segment. And then the Star Bazaar network expanded which is part of Trent which is one of my favourite retail plays in India. I will believe the way Star Bazaar is growing in terms of reach, footfall, quality and they sell all these package goods through that outlet. So, it is a very good value chain that they are part of. And I think the stock will get rerated a supplier to a retail chain rather than a chemical company going forward.
Kritika: You pointed out how it was difficult for them to sell the urea business. As far as the Haldia plant is concerned, it was shut down for a significant period of time. What is the valuation that you think they can get for the Haldia plant in West Bengal? And my second question is on the international business. How significant would it be for them to either bring in an investor or completely restructure the international operations?
A: Let me take the restructuring of the foreign business first. Kenya is something which is a complete commodity driven business and primarily, Tata Tea and all of that have been very strong historically. But given the fact that getting out of these markets which are not so significant, an overall business for them has never been more than about 16-17 percent and hence the contribution is even lower. This is the topline contribution. Profitability-wise it has been bleeding.
So, there is no point in setting up operations in so many places and you cannot manage this well. Now, the Haldia business, the plant has always had issues related to efficiencies. And I think the huge debt that they had which they have been talking about bringing down and they have brought down was primarily for that Capex. It has never paid them off. The return on equity (ROE) has been languishing thanks to that whole thing. Even if they sell it on a slump basis, if they sell it and get whatever they have invested, they will be very happy. I would be very happy as a shareholder to see that happen.
So, my sense is it is more of getting rid of the baggage and become lean and mean to be focused on to what is paying well and what is likely to glow with very high levels of visibility in the consumer business.