Singh Helps Tata Revive $850 Million Urea Plan: Corporate India

Tata Chemicals Ltd., the world’s second-biggest soda ash maker, plans to revive a $850 million spending proposal to double its urea capacity after the government said it will guarantee returns on investments.

The company plans to boost its ability to make the nitrogen-based soil nutrient at its Babrala urea plant in northern India to 2.5 million metric tons in the next three years, Managing Director R. Mukundan said in an interview. The Mumbai-based chemicals maker “was waiting for the policy” to resume plans stalled since 2010, he said. The government will assure new urea units a profit margin of 12 percent to 20 percent, Food Minister K.V. Thomas said last month.

“It was on hold simply because the policy wasn’t clear,” Mukundan said in his office in Mumbai. “Now that it has been clarified, we will come out with a decision shortly.”

Tata Chemicals, which accounted for about 3 percent of Tata Group’s $100 billion revenue in the year ended March 31, 2012, is counting on a supply shortage of urea in India as the government seeks to reduce dependence on imports to boost farm productivity and feed the world’s second-most populous nation. The doubling of capacity will add $500 million to the company’s revenue when the factory turns operational, said Tarun Surana, an analyst with Mumbai based brokerage Sunidhi Securities & Finance Ltd.

Shares Rebound

Shares of the company have rebounded 14 percent since the start of December and reached a 17-month high on Jan. 8, and traded at 371.95 rupees as of 10:23 a.m. in Mumbai, according to data compiled by Bloomberg. The benchmark BSE Ltd. Sensitive Index rose 1.8 percent in the same period.

State incentives will encourage more manufacturers to set up plants, said Surana, who is among the 16 analysts rating the Tata Chemicals stock a buy. Three advise holding it, while one recommends selling, according to data compiled by Bloomberg.

“We see seven to eight new urea plants coming up that were all under planning,” Surana said. “The final go-ahead was awaiting the policy.”

Government control on the price of urea and ambiguity over natural gas feedstock costs have deterred new investments in the sector for more than 10 years, leading to an increase in imports and state subsidies. Investments of 500 billion rupees ($9.1 billion) could flow in as state-run enterprises and co-operatives add 10 million metric tons of capacity, S.C. Sharma, an officer with the Planning Commission, said last month.

Urea Imports

Aditya Birla Nuvo Ltd., the $4 billion chemicals-to-telecommunications group owned by billionaire Kumar Mangalam Birla, may consider $1 billion in spending to double its urea capacity after the new policy was approved, managing director Rakesh Jain said in an interview in November.

State-run Rashtriya Chemicals & Fertilizers Ltd. and Chambal Fertilizers & Chemicals Ltd. are the other two companies that have stalled projects.

India imports a third of the 28 million metric tons of urea it needs and the supply shortages may widen to 12 million tons by March 2017 unless new capacities are added, according to a 2011 Planning Commission report.

The government signs purchase agreements with manufacturers for about eight years, while loan tenures may extend as long as 12 years, making it difficult for producers to access debt funding to set up the facilities, Surana said.

“Financial closure still remains challenging,” he said.

Lentils, Salt

Tata Chemicals is also counting on sales of non-commodity products to boost sales and profit as former chairman Ratan Tata, who retired last month, set a vision of $500 billion revenue for the group. Mukundan expects the non-commodity business to account for 50 percent of the revenue in five years, after its share doubled to 22 percent in the last seven years.

Soda ash, a commodity used for making glass, contributed to 45 percent of Tata Chemicals’ overseas revenue.

The company has been introducing branded consumer products including packaged lentils, iron-fortified and low-sodium salt, water purifiers and crop-specific pesticides. It is also setting up a 300-ton factory in the southern city of Chennai to make artificial sweeteners and probiotics.

Rising income levels in Asia’s third-biggest economy and urbanization will fuel demand for these products, said Sachin B. Bobade, a Mumbai-based analyst with Brics Securities Ltd.

“The food segment has been growing in double digits in the last two to three years,” said Bobade. “No slowdown is expected here.”

Profit at the company rose 28 percent last financial year to 8.4 billion rupees on a 25 percent growth in sales to 138 billion rupees, data compiled by Bloomberg show. Still, foreign-exchange fluctuations and plant shutdowns dragged down profit in the current year, with net income falling in the three quarters through Sept. 30.

“The idea is to be more consumer facing,” Mukundan said. “It will help the company to decommoditize its portfolio.”

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