The less popular of the Tata Group companies, Tata Chemicals is in fact the largest producer of salt in Asia - Tata Namak, Desk Ka Namak - who hasn’t heard of this brand?! What is lesser known is that it is also the 3rd largest manufacturer of soda ash in the world, and that is also the 6th largest manufacturer of soda bicarb in the world.
It also makes fertilisers and pesticides, and silica, and prebiotics. And it used to also make spices, and pulses, and packaged foods. Everything seems unrelated, no?
So why did Tata Chemicals spread its wings so wide?
While it seems like Tata Chemicals lost its way, and it did to some extent, lets play the advocate in favour of Tata Chemicals for a bit.
It’s quite easy to track down why they moved where they moved, segment-by-segment, but with just a little bit of revisiting your chemistry lessons, just a litte bit.
Salt is sodium chloride, soda ash is sodium carbonate, and soda bicarb is sodium bicarbonate. So there is a common link of sodium in this entire story. Hence, as part of forward integration, it made all these.
When sodium chloride is reacted with ammonia, water and carbon dioxide, you get sodium bicarbonate and ammonium chloride. When you heat sodium bicarbonate, water and carbon dioxide get released, and sodium carbonate (soda ash) is left. And ammonia is left out in the process.
2. Agricultural Inputs
Ammonia (NH3) is rich in nitrogen. Nitrogen is an essential fertiliser. So it was natural for Tata Chemicals to start making urea, and then expand this business into making other fertilisers, pesticides and seeds.
3. Consumer Food
Now that Tata Chemicals was making salt, and had branded it (rather successfully), it also expanded this business into making other consumer food products. That included spices, pulses, packaged food, etc. This is where we feel Tata Chemicals went a little overboard - from being a chemical company to also adding consumer products. Good news though, the branded salt business along with all other consumer products was taken out of Tata Chemicals, and mixed with the coffee and beverages businesses of the Tata Group into Tata Consumer Products.
Now that Tata Chemicals could focus on its core business of chemicals, and also had significant expertise in consumer products, it ventured into making prebiotics. Mainly FOS and GOS - Fructooligosaccharides and Galactooligosaccharides.
5. Materials ++
It also enhanced its Materials business (salt, soda ash and sodium bicarbonate) by adding silica, nano materials, lithium ion, and stuff that has high growth potential. Being one of the largest players in Base Chemicals, the growth potential is pretty stunted for Tata Chemicals. It has to add new things to keep growing at high rates.
What’s there to like in Tata Chemicals?
That it got rid of its urea business and consumer food division, and is now a focused chemicals company.
A privately owned urea business is a pain to operate in India, given the heavy regulation and government intervention around subsidies. That’s a very interesting story for another time though!
And the consumer business, albeit high margins and superior return ratios, it’s best left to be managed and expanded in a consumer-centric company rather than a chemicals company.
By the way, Tata Chemicals still manufacturers all the salt for Tata Salt. The brand sits in Tata Consumer Products, but the production in Tata Chemicals. Now the structure is simple. Three divisions. Base Chemicals and Specialty Chemicals in each of those three divisions. Higher focus on Specialty because that’s all high-growth potential, with superior margins, and better return ratios.
Again, what’s there to like in Tata Chemicals?
While the business is divided in 3 divisions (materials, agriculture and nutrition) vertically, it is can also be divided into basic chemicals (the old stuff where it is already a market leader) and specialty chemicals (the cool new stuff).
1. Base chemicals (salt, soda ash and sodium bicarbonate) form 75% of Tata Chemicals business. Soda ash forms a major part of this.
Soda ash volumes have been picking up globally post COVID. Also, the use cases for soda ash have been picking up - more use of glass, water treatment, etc.
Moreover, the supply situation is favourable. For a change, China is using so much soda ash that it has to import it. We have all seen a polar opposite trend for other things, where China floods global markets with things they make.
The demand-supply situation is also resulting in favourable pricing for soda ash. Tata Chemicals took a Rs. 3,000 per tonne price hike in 2Q this year, and another Rs. 4,000 per tonne hike in 3Q.
Also, Tata Chemicals was facing issues in this business in Kenya, at which it is at a better place.
And, Tata Chemicals owns mines of trona (the natural stuff that soda ash is made of) in North America, which gives them a siginificant cost advantage relative to synthetically making soda ash.
Exciting stuff from the above - Tata Chemicals saw a growth of 27% in soda ash volumes in 2Q this year, compared to the previous year. This led to a 22% growth in its base chemicals business. Which is high and exciting for a boring old business.
2. Specialty chemicals form 25% of Tata Chemicals right now. Lets leave out the technical bits, we may be OD-ing on it by now after that chemistry. Points to note:
It has patented technologies, and is the only manufacturer in India for some products.
It has piloted its products in the market, set up trials and factories and commercialisation is happening fast.
Its driving this initial success into expanding its market, both in India and globally.
All the areas it has expanded into are high-growth, new-age and have the potential for scale. They also have higher margins and a better financial profile.
The heavy-lifting of investments has been happening so far. Now it’s time to scale and monetise.
Clean Up + High Growth = Better Financials
There’s a turnaround in financials. We’ll let charts do the talking, rather than words.
Valuation re-rating on the cards
It’s simple really. Better businesses, with strong moats and high growth potential get better multiples. Specialty chemical companies in India trade at a steep premium to Tata Chemicals. With the base business showing phenomenal growth, and the new business showing promise, there sure is a legit case for valuations of Tata Chemicals to be higher than they are.
Of course, with risks associated to the thesis. Input costs are on the rise, and that may impact the profitability of Tata Chemicals, if it can’t pass on these cost increases in the form of higher pricing. Coal prices are up, so are gas prices. Then there’s the risk of new businesses not picking up fast enough, or at all.
Why Tata Chemicals?
This stock is part of our Value Migration portfolio. It capturing the value movement in new chemical businesses in India and globally, makes it a good fit for us. For more stocks that capture value migration in different ways, go invest!