Tata Chemicals Limited Investor Update Call Transcript August 10, 2016

Transcription

1 Tata Chemicals Limited Investor Update Call Transcript August 10, 2016 Gavin Desa Ladies and gentlemen, good day and welcome to the Tata Chemicals Limited Investor Update Call. Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Gavin Desa. Thank you and over to you, sir. Thank you. Good day, everyone, and welcome to the Tata Chemicals call to discuss the sale of Tata Chemical's Urea and Customized Fertilizer Business. We have with us today, Mr. R. Mukundan Managing Director and Mr. Chief Financial Officer.. I now request Mr. Mukundan to share some of the perspective on the transaction. R. Mukundan Thank you, Gavin. Thank you, all, for joining us on this call to discuss today's announcement of transfer of our business of sale and distribution and manufacture of urea and customized fertilizer. The manufacturing is done at Babrala and this transfer is by the way of slump sale to Yara Fertilizers India Private Limited which is a 100% subsidiary of Yara International ASA of Norway. The lump sum consideration for this transfer is Rs. 2,670 crore subject to certain adjustments after closing as agreed between parties. It is also pursuant to a scheme of arrangement approved by the Board of Directors and subject to all requisites, regulatory and other approvals and sanctions by High Court or, the National Company Laws Tribunal as in the manner agreed by Tata Chemicals and Yara. Broadly speaking, this transaction is in line with our strategy of not investing in subsidy and regulated businesses. It also creates a meaningful value for the Company by enabling us to focus on growing our consumer and maintaining our leadership in inorganic chemicals business and investing further into technology in terms of the nano materials as well as biochemical business. With this, we will begin a journey to focus our farm business through our subsidiary Rallis and Metahelix. With this overview, we would be happy to take your questions. Page 1 of 10

2 Shiladitya Dasgupta Thank you very much, sir. We have the first question from the line of Shiladitya Dasgupta from ICICI Prudential Life Insurance. Please go ahead. Sir, just wanted to understand that out of this Rs. 2,670 crs how much will be coming into the Company? That is, basically the outstanding subsidy for the fertilizer business is a part of this Rs. 2,670 crs? or that has to be looked at separately? Second question is, because of this sale how much capital employed will be reduced? The Rs. 2,670 crore is assets plus working capital, so that will all come into business. R. Mukundan And the working capital asset which it will bring in which will come in favor is related to the urea business. Shiladitya Dasgupta So how much working capital gets reduced because of this? What is our working capital towards urea business? R. Mukundan You will have to see on that particular day what it is, so this will be average which we have worked out and this is done on the basis of average and the adjustments will be made as on that date. Shiladitya Dasgupta Shiladitya Dasgupta And second question is, how much capital employed comes down because of this sale? Once we establish the discontinuing operation in the next reporting deadline we will show you that number separately, we do not currently publish the urea numbers separately. And what will be the utilization of the incoming money? On the utilization of cash, there is not decision made yet, when this process comes to fruition in next nine to 12 months a decision will be made at the Board level on how we utilize the cash. R. Mukundan And broadly speaking, as I said, our focus areas for growth are in line with our strategy which I have already outlined and that is where we will be doing investment. We have already intended to invest in that. Specific utilization is something which the Board will decide. Sourabh Gupta Thank you very much, sir. We have the next question from the line of Sourabh Gupta from Quantum Asset Management. Sir, my question pertains to what is our strategy towards complex fertilizer side, so will we continue with that business or that is also on the block? And secondly, what was the EBITDA for urea business for FY16, if you could give me. R. Mukundan So let me address the first question, as far as the fertilizer business per say is concerned, we said that we are not going to invest any further capital and we are continuing to pursue that approach. And world-class buyer did come for this asset so we decided to sell in favor of a world-class player like Yara. And if we get Page 2 of 10

3 options for the complex fertilizers as and when they arise, we will look at those options in the best interest of the Company and the shareholders and employees. That is our broad approach. We are intending to continue our stated objective of investing only in the businesses which we intend to grow. They remain our consumer business and the inorganic chemical business and focus the farm business through Rallis and Metahelix. Sourabh Gupta Dheeresh Pathak And sir, what would be the EBITDA for FY16 for the urea business, if you could share. Sorry, we don t disclose that data. Thank you, Mr. Gupta. We have the next question from the line of Dheeresh Pathak from Goldman Sachs. Please go ahead. How much is the working capital in the business that will also go along with the manufacturing asset? R. Mukundan So, it would depend on what the number is on that day. Dheeresh Pathak As a general point we don t disclose such data, we do not have a decision yet on how we are using the funds and we do not have any disclosure on the EBITDA, working capital figures. But, would it be fair to say that a large part of this consideration is towards working capital? R. Mukundan We cannot say that because, you will have to derive your own conclusions on the basis of specifics of what people who give a divided figure, we do not give a divided figure. Apoorva Bahadur Thank you, Mr. Pathak. We have the next question from the line of Apoorva Bahadur from ICICI Securities. Please go ahead. So, I wanted to understand this. So post the sale of the urea business, I believe that the consumer business will constitute more than 10% of the top-line. And given the separate business dynamics that it has when compared to other businesses, I mean, the distinctness of business rivals and the homogeneity of consumers. So will it be correct to assume that it will be reported separately going forward? R. Mukundan These decisions are taken by the audit committee and by our Board and they have always been reviewed from time to time. I am sure that our Board and audit committee will review it and will come back to a specific point of time. As far as your question on the nature and the size of business is concerned, we are fully aware as we continue to grow the consumer business its share and size will continue to grow. Apoorva Bahadur And the other question is, what is the consummation date for this transaction? I mean, what is your long stop sort of a date, is there any specific date that you would like to give? Page 3 of 10

4 R. Mukundan We will have to go through a court process, broadly what we have been advised by the lawyers in general, it takes between 9 to 12 months, so we should be closing in about 9 to 12 months. And till that time this is still our business. Apoorva Bahadur And regarding the subsidy part, I mean, basically the net realization for the transaction, that has not been decided yet, right? Yes, correct. R. Mukundan Yes, it will be adjusted for the working capital on the closing date but every business this is slump sale which includes asset and subsidies working capital going along with it. So we will be paid fully for our working capital. Abhijeet Akella Thank you very much. We have the next question from the line of Abhijeet Akella from IIFL. Please go ahead. If you could just talk a little bit about the impact on the key balance sheet items and on the financial metrics. So what kind of impact on the earnings do you expect, I mean, how much interest cost reduction will there be that will offset the give up of profit from urea and similarly impact on fixed assets and working capital? Abhijeet, we are not in a position to discuss that just now, when we publish our quarter 2 results in November you will see that as discontinued operations and all the information will be provided. R. Mukundan I think my view, the way I look at it is that we have a business which we were not investing in, which was having a lower margin business. So as we focus our energy on high margin business and release cash from low margin business, broadly speaking it moves in line with our strategy. So that is really the bigger story that the Company is in the process of transforming itself and this is a major decisive step the Board has taken to transform the Company. So while you can work out the nitty-gritty for one year, if you take a two - three year view it is a very-very different picture that these questions will just wash away. Abhijeet Akella And just to understand, is there likely to be a gain on this transaction that we will report? R. Mukundan There is a gain, while working capital will be paid for as on par, for the other part there would be a gain Anil Shah Thank you, Mr. Akela. We have the next question from the line of Anil Shah from Birla Mutual Fund. Please go ahead. Could you tell us what has been the average working capital for the urea business over the last few years, if you can take an average on last three years, two years or even last one year? Page 4 of 10

5 R. Mukundan So, we can give you the overall number which we reported what the number was which is between the two business about Rs. 1,400 crore to Rs. 1,600 crore and I think urea would be close to Rs. 800 crore - Rs crore. Anil Shah And this would include, when we say working capital, this would also include the long overdue receivables which have to come from the government yet? R. Mukundan Yes. Anil Shah So about Rs. 800 crore to Rs. 900 crore? R. Mukundan That is a historical number, but specifics will have to be worked out for this, this is a slump sale. Anil Shah Historic would mean in the recent past or really going back? R. Mukundan Last couple of years, that is what you asked. Danesh Ranchhod Alok Deshpande Thank you, Mr. Shah. We have the next question from the line of Danesh Ranchhod from Templeton. Please go ahead. Just a quick one, regards the slump sale, does this mean that the subsidy collection will fall on Yara or would Tata Chemicals probably be responsible for that? This is our business until the court approves the transfer, so we will sell and collect the subsidy. And post that, it belongs to Yara. Thank you, sir. We have the next question from the line of Alok Deshpande from HSBC. Please go ahead. My question was regarding, post the sale would the distribution teams that you have for urea would also move to Yara? Basically I want to know how will the complex fertilizer distribution work post urea moves to Yara? R. Mukundan So, the plant moves, also the sales and marketing teams move. If you look at really the issue which we have which we are working out with Yara in the coming 6 to 9 months is on the sales and distribution network. The distribution network in north pretty much will shift to Yara, and the one in the east where we sell bulk of our phosphatic business remains with us. But that network is also needed by Yara to sell part of the urea, so we will work out an arrangement with them. And this is all subject to Competition Commission post CCI approval. Till that time we cannot even start discussing with Yara on the arrangements which we can have. Rohan Gupta Thank you, sir. We have the next question from the line of Rohan Gupta from Emkay Global. Please go ahead. Sir, first question is on debt reduction. You still have almost Rs. 2,700 crore debt on a standalone balance sheet. Given that, the money will be coming in a standalone balance sheet, so do you have any plans to reduce the debt in near term? Page 5 of 10

6 R. Mukundan We would not like to allocate any specific use for this, it is a matter which Board will make. As far as the operations of the standalone and consolidated are concerned, we have no concerns on our debt levels or meeting our working capital needs through our ongoing operations, or growth aspirations through our ongoing operations. That is our view. This additional cash which has come in, the Board will decide how to use it. Rohan Gupta Sir, second question on this customized fertilizer along with urea, so what is the customized fertilizer capacities right now, is it that NPK fertilizer that you had almost 1.5 lakh ton put and invested almost Rs. 150 crore in that, what does this customized fertilizer plant include? R. Mukundan I think the investment which we had done was not Rs. 150 crore, it was between Rs. 50 crore - Rs. 60 crore. And this is not the complex fertilizer, this is mechanical compaction of various formulations. So that plant is in Babrala. Rohan Gupta So that also goes along with the urea plant? R. Mukundan Our production has been about 35,000 tons - 40,000 tons broadly. Thank you, Mr. Gupta. We have the next question from the line of Sudarshan Padmanabhan from Sundaram Mutual Fund. Please go ahead. Sudarshan Padmanabhan I just have a small elementary doubt with respect to the valuation of Rs. 2,670 crore, would it mean that you would be receiving Rs. 2,670 crore in addition to the debt moving out of your books on the urea side? There is no debt being transferred, all the debt stays with TCL. Sudarshan Padmanabhan So that is a working capital right, whatever that you have majority of that. Working capital within the urea business that is correct. Sudarshan Padmanabhan So the working capital will move out of your books and in addition to that you would be getting Rs crore, right? This is sold as a slump sale, so working capital plus assets. Sudarshan Padmanabhan So that is included in the part of this thing? R. Mukundan Yes, subject to adjustments they work out. Sudarshan Padmanabhan So this Rs crore can move up or down with respect to that? Yes, it is also subject to tax as well, don t forget. Sudarshan Padmanabhan And my second question is, I mean, here if one was to look at in terms of capital allocation, now you had clearly mentioned that your capital allocation was not going towards the subsidy side of the business. But, I mean, if I am just looking at a three year, four year, five year view, I mean, would it be right if I assume that Page 6 of 10

7 majority of your capital allocation would primarily move towards your FMCG, salt business and whatever is left would basically come for your soda ash business? R. Mukundan In terms of capital for FMCG business and salt is fairly minor because most of the investment we make we treat it as a revenue item. As far as the soda ash business is concerned, we are looking at opportunities in US to expand and that entity has enough earnings to support itself. And most of the capital spend in soda ash has been on systemic side. Rakesh Vyas Thank you, sir. We have the next question from the line of Rakesh Vyas from HDFC Mutual Fund. Please go ahead. Couple of questions sir, one, just to get the understanding right on this consideration of Rs. 2,670 crore, is it fair to assume that when you say it is subject to certain adjustment, the adjustments are related to a normalized level of working capital already included or it does not include any working capital at all? R. Mukundan So this is normalized working capital, so if there are peaks and troughs they will accordingly be adjusted. Rakesh Vyas Secondly sir, just as a strategy we have decided not to deploy incremental capital in this kind of business, but as a part of deal does it bar us from entering this business at all for certain period of time? R. Mukundan We have signed a non-compete on urea business and we will not enter, we were anyway as a strategy not looking to put anything further in that business. Rakesh Vyas Non-compete is for how long sir? R. Mukundan Three years. Trilok Agarwal Pankaj Masutage Thank you, sir. We have the next question from the line of Trilok Agarwal from Birla Insurance. Please go ahead. So the subsidy outstanding was Rs. 1,479 crore as on 30th June. Can you just share what was the spillover subsidy of the previous year in terms of those legacy subsidies which are getting delayed or receivables which are getting delayed? Roughly Rs. 1,000 crore. Thank you, sir. We have the next question from the line of Pankaj Masutage from Athena Investment. Please go ahead. Sir, what is the thumb rule for valuing urea business? R. Mukundan Sorry, I think you got many-many ways to do it, I cannot comment on it. Pankaj Masutage Okay. And any subsidy that is to be received from this urea business from the government? Page 7 of 10

8 R. Mukundan We talked about it just now. Manan Mehta Thank you. We have the next question from the line of Manan Mehta from HDFC Bank. Please go ahead. Sir, in the press release what we have mentioned is that the brands of Paras, PKS and Daksha, they would continue to remain with Tata Chemicals. So is there some royalty payment which we have structured in the transaction? R. Mukundan No, basically there is a transition agreement for only one Paras brand which they will need for some time to transition into their own brand. Other than that, all these brands are property of Tata Chemicals, so we will continue to use these brands in our network going forward, to the extent; we want to market these products in these markets. Manan Mehta Sir, and the second question is, what would be the key approvals besides the court approvals and the creditors approval? Like for example, is there any other approval from DoF or any other ministry which is required for this? R. Mukundan No, it is clearly the Competition Commission clearance which we need in addition to the court process and the creditors approval. In addition to that, we would also need shareholders approval. But beyond that, of course we would seek the support of all the regulatory authorities whether it be the vendors of gas or the Fertilizer Ministry, everybody. But broadly in my view, the view which is being taken is that this is probably the first and the largest foreign investment in fertilizer sector coming in. So we do hope that all these approvals are obtained on time. Deepak Shah Thank you, sir. We have the next question from the line of Deepak Shah from DS Research. Please go ahead. Mr. Munkundan, actually my question is regarding this holding of yours in Tata Sons actually. Now that the Company's management is restructuring the operations of the Company, why don t you look at certain investments which you have in Tata Sons and other group companies which can also be unlocked? So any comments on that. R. Mukundan So, let me just say, my role is to run the company and the operations, the issues of our cash and capital of those nature are taken by the Board. So I am more than happy to address any questions on strategy, how to improve or increase our market franchise and consumer or improve but these are the areas which I would not want to comment. Deepak Shah One more question actually, in one of the interviews which you gave a couple of years back, you had mentioned about Tata Chemical could touch a revenue of Rs. 30,000 crore, if you remember that about two years back or so you had given this interview. So, you stand by that? R. Mukundan Sorry, I do not know what we are referring to, but certainly if you look at the potential of consumer business, in my view as India urbanizes, as people move from lose products to packaged products and within packaged products to branded products, it presents a terrific opportunity for companies which want to deliver quality which have access to sourcing strength which we have through our entity in Page 8 of 10

9 Rallis and Metahelix and the technology which we have in our innovation center to provide value for consumer. So we are very clearly seeing immense potential. We do want to grow our business at faster than market rates and we will continue to focus on that. Meghna Sarawgi Thank you, Mr. Shah. We have the next question from the line of Meghna Sarawgi from Aditya Birla. Please go ahead. Sir, which are the brands that are moving to Yara? And second is, how will the distribution network of the remaining brands be taken care of? R. Mukundan No, the brands are not going to Yara at all, the brands remain with us. So we will continue to market in these brands. Meghna Sarawgi I just heard that Paras is going to be R. Mukundan No, there is a transition arrangement in the sense that for Yara to bring its brand, till the time they bring their brand they will use our brand but for a temporary period. We will give them a license to use the brand for temporary period three or four months broadly. Meghna Sarawgi So are they paying you anything to use your brand? R. Mukundan No, this is just a transitionary arrangement to help them to get their brand in and after that the brand reverts to us. Meghna Sarawgi OK, you mentioned the distribution network broadly will move other than the east, so how will the distribution network for the remaining brands for Rallis and for Metahelix be taken care of? R. Mukundan So Rallis and Metahelix have their own network all India, that is not being touched at all. And also our phosphate fertilizer in the East has its own network, so that is not touched. There is a bit of urea which is sold in East which Yara will need to access the network which we have. We will work out arrangement after this CCI approval. Thank you, ma'am. Ladies and gentlemen, that was the last question. I now hand the conference over to the Management for closing comments. Over to the Management. R. Mukundan Thank you, all. I just wanted to again reemphasize that this has been a fairly decisive decision by the Board to support Management's direction in terms of building our consumer and inorganic chemical business and focusing the farm business through our subsidiaries Rallis and Metahelix. We are really excited about this journey and we also are excited by the fact that we got a world-class partner in Yara to take ownership of one of the businesses which we have run probably for the last 25 years. Our direction in the remaining part of the business remain the same that we will continue to look for options and as and when these options fructify which is in the interest of the shareholders and the employees, we would move on to those options. Our focus will continue to be as I said, maintaining consumer business and maintaining leadership in inorganic chemical business. Thank you, all. And thank you for your time. Page 9 of 10

10 Thank you very much, sir. Ladies and gentlemen, on behalf of Tata Chemicals Limited, that concludes this conference. Thanks for joining us and you may now disconnect your lines. Thank you. Page 10 of 10