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The Stormrider

Virendra Verma     October 7, 2009
ACADEMIC BACKGROUND: MBA from FMS Delhi, B Tech from IIT Rourkee.
THE TATA JOURNEY: Joined Tata Administrative Services in 1990; first assignment with the Indian Hotels Co in projects department; in 1994, joined the start-up team at Tata AutoComp. In 2001, joined Tata Chemicals as Vice President.
BIGGEST ACHIEVEMENT SO FAR: Involved in three global acquisitions made by Tata Chemicals. Currently managing their integration.
NEWEST CHALLENGE: To exploit synergies with group company Rallis India.
LITTLE-KNOWN FACT: The second-youngest MD in the Tata Group after Mukund Govind Rajan of Tata Teleservices (Maharashtra).

A couple of years ago, any billion-dollar, or over, acquisition overseas was hailed as the arrival of India Inc. on the global stage. Then came the global recession, and acquirer after acquirer stumbled, as demand conditions softened, and the debt used to finance these transactions became the proverbial millstone around the necks of acquisitive promoters. Suddenly yesterday’s gung-ho globalisers were transformed into clueless adventurists. Tata Steel, Tata Motors, Hindalco, Suzlon….it’s a long list of India’s largecap cream that was tarred with the brush of apparently recklessness.

Not too many of India’s big league have been able to buck that trend. If there’s one in the top tier that has shown signs of making sense of its merger & amalgamation (M&A) spree, it’s the Rs 12,341-crore Tata Chemicals (TCL). Since 2006, the manufacturer of fertiliser, soda ash and edible salt made three global acquisitions of soda ash capacities. The last one was the biggest—worth just over a billion dollars—and was done at the peak of the boom times in 2008. TCL paid Rs 4,800 crore for a 100 per cent buyout of General Chemicals Industrial Products of the US in January, 2008. A couple of years before that, another significant acquisition took place—that of Brunner Mond of the UK for a little over Rs 508 crore, for a 63.5 per cent stake (see Takeover Trail for the full list). With these purchases, TCL became the second-largest manufacturer of soda ash in the world, after Solvay of Belgium.

At first blush, TCL’s numbers would indicate that it is reeling under the burden of achieving that size and scale—which can backfire badly when demand conditions turn soft. Net profits fell 21 per cent to Rs 760 crore (consolidated) even though sales jumped 87 per cent to Rs 12,341 crore for the year ended March 2009. In the first quarter of the current fiscal, net profit plunged by 60 per cent to Rs 42.5 crore while sales were almost flat at Rs 2,274 crore.

That may not be the best of report cards to flash around, but it is still better than those of the likes of Tata Motors, Tata Steel and Suzlon, which were all floating in a sea of red in the June ended quarter. More importantly, what should hold TCL in better stead is that it did not rely too heavily on debt for its buyouts. That is reflected in a debt-equity ratio of 1.31 at the end of March 2009 compared to 1.29 in the previous year. In comparison, the corresponding ratio for companies like Tata Motors, Tata Steel and Suzlon had increased by almost 50 per cent last fiscal over the previous 12-month period. TCL was able to repay debt of Rs 440 crore and increase its cash position to Rs 1,253 crore at the end of June quarter, indicating a stable liquidity position.

“In the midst of the slowdown, we were fortunate to have a portfolio of businesses that had a mixed reaction to the slowdown,” points out 43-year-old Ramakrishnan Mukundan, Managing Director, TCL. He adds that sales to the fast-moving consumer goods sector (soda ash is used to make detergents) and the edible salt business were not impacted by the downturn. Fertiliser volumes weren’t impacted, and if soda ash did take a hit, it was because two of its biggest end-user industries— automotive and construction— were hit by the slowdown (soda ash is used to make flat glass, which is used in both these sectors).

That’s Mukundan giving the operational rationale for TCL being able to survive the downturn. Yet, analysts tracking the company as well as company insiders are quick to bestow some of the credit on Mukundan himself. Says Ajay Parmar, Head of Research, Emkay Global Financial Services: “Compared to the turmoil the world has gone through, Mukundan has done well for himself to ensure a relatively smooth sailing.” He also has age on his side, adds Parmar.

Indeed, when Mukundan took over the reins at TCL in December 2008, he was just 42, making him one of the youngest CEOs in the nearly-100-company-strong-Tata Group— the youngest was Mukund Govind Rajan, who became MD of Tata Teleservices (Maharashtra) at 39. The manager from the Tata Administrative Service (TAS) joined the group in 1990 in the projects department of Indian Hotels Co; four years later, he moved to Tata AutoComp; by 2001 was with TCL as Vice President.

Mukundan, who was Executive Vice President at TCL when it embarked on the acquisition gambit, was hands-on involved in the M&A exercise, working closely with then Managing Director Homi Khusrokhan. Although the buyouts were done when markets were near peak levels, Mukundan points out that what will make it easier to make them work is that the entities taken over have low cost structures. “That’s advantageous both in the bad and good times,” points out the Managing Director. For example, the acquisitions in the US and in Kenya had natural soda ash deposits where the cost of manufacturing is lower than that of synthetic soda. The cost of manufacturing soda ash through natural deposit is $60-70 per tonne while for synthetic soda ash it is $100-130 per tonne; the selling price for both is the same.

Mukundan may have been part of the think-thank that strategised the acquisitions, but now he is at the forefront of the task of making them work and integrating them into TCL. The company’s cost saving and cash conservation programme—Action for Downturn Alleviation for Profitability in Turbulent Times (ADAPT)—has also been implemented in these companies. Through this programme, TCL was able to save Rs 50 crore in the June ended quarter. Its UK subsidiary Brunner Mond commissioned a new sodium bicarbonate plant with a capacity of 50,000 metric tonnes last quarter and its benefits would be visible in the next couple of quarters.

The timing might just be right for TCL’s acquisitions to begin making meaningful contributions, what with an economic revival beginning slowly but surely. “The good news is that the bottom has been tested,” says Mukundan, who expects prices to peak in three years. Analysts expect demand for soda ash to recover soon, what with the automotive and real estate markets showing signs of recovery.

Perhaps Mukundan’s biggest success so far has been in convincing the Tata Sons’s top brass to leverage synergies with group firm Rallis. TCL has increased its stake in the agrochemicals maker to 45 per cent (from 9.4 per cent), as both companies have products that are targeted at the agriculture sector (fertiliser and agrochemicals). The synergies that can be exploited include selling agro chemicals through TCL’s 600 rural retail outlets Tata Kisan Sansar. Analysts don’t rule out a merger of Rallis into TCL in future, although TCL officials refuse to shed more light on the matter.

A shot in the arm for TCL’s fertiliser business is the assured supply of natural gas from Reliance Industries’ KG Basin. This will ensure that TCL is able to increase capacity utilisation of its urea plants and also reduce its costs. An increase in capacity is also on the cards now. “De-bottlenecking of the capacities would not have been possible had the government not allocated additional gas,” says Mukundan. TCL has increased capacity by almost 10 per cent to 3,500 metric tonnes of urea per day through the de-bottlenecking exercise. Analysts say the additional capacity will help improve profitability. The economic revival will doubtless come to TCL’s rescue in the quarters ahead; and if Mukundan succeeds in integrating the overseas acquisitions, he will be amongst the first CEOs of India Inc. to prove that big-bang buyouts can actually work.

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