Pedestrians walk past Bombay House, headquarters to the Tata Group, in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Pact To Buy Salt From Tata Chemicals Won’t Impact, Says Tata Global CEO Ajoy Misra

Tata Global Beverages Ltd. said its acquisition of food brands from group peer Tata Chemicals Ltd. will be beneficial to both the parties and won’t impact its margin of the consumer business.

Tata Chemicals will supply salt to Tata Global under a 25-year agreement. The arrangement will be similar to the one between the chemicals and consumer divisions within Tata Chemicals, Ajoy Misra, managing director and chief executive officer at Tata Global, told BloombergQuint in an interview. It won’t eat into the margins of consumer division that is being transferred to the company, he said.

“It is the same arrangement that they have today and it’s not at the cost,” Misra said. “Going forward, both sides will participate in the upside.”

Tata Chemicals will transfer the consumer division, valued at nearly Rs 5,800 crore, as the salt-to-software conglomerate streamlines operations under N Chandrasekaran, chairman of parent Tata Sons Ltd.

Tata Global also plans to enter branded coffee but doesn’t see the need to consolidate with Tata Coffee Ltd., in which it holds around 60 percent stake.

Also read: What Chandrasekaran’s Third Business Restructuring At Tata Group Means

Watch the full interview here:

Here are the edited excerpts from the interview:

Can you take us through the entire deal process? Are you getting only brands or are you also getting manufacturing facilities?

If you look at the last couple of times Tata Chemicals has reported, they have segment reporting and the consumer part of the business is a segment that they report separately. So, the consumer part of that business is coming together with Tata Global Beverages consumer play to form a new entity. So, Tata Global Beverages will be rechristened going forward, subject to approvals, to Tata Consumer Products. The arrangement to manufacture salt and supply salt to their consumer products business or to Tata Consumer Products Ltd. will remain and will be roughly the same as it exists today. Salt will continue to be produced in the Mithapur factory, which is an integrated factory that produces soda ash, salt and desalinates water in the process, which is then used, so that they actually don’t draw any ground water. So, it is a very integrated operation which remains, and it is good because that is the core competency of that business. And we continue to have salt supplied to us at an arm’s length, with transfer pricing arrangements overseen by independent verifiers, which is roughly similar to the transfer pricing arrangement they currently have. So, we are assured of salt supplies of the highest quality. This is vacuum evaporated salt which has the highest purity and is iodised.

However, from the rail heads in which the rakes bring the salt, it goes to roughly 26 locations or CFA stored packing units and then they are packed depending on the factories and markets they serve within India. Then it goes to distributors and then to retailers. So, those packaging factories and CFAs come along with the business and that’s Tata Salt.

Pulses and derivatives like besan and spices and ready-to-cook food and snacks which are our new categories that they have entered with Tata Sampann. They have their own third-party packers and all of that business comes to us or comes together on this entity. So that is roughly the way it is and of course the brands, Tata Salt and its variants like Tata Salt, Tata Lite, Tata Salt Plus and Tata Salt Crystal and all the other brands.

So, it is fair to say that it is an asset-light acquisition.

Yes.

Tata Salt is supposed to be a cash cow for Tata Chemicals. When it gets transferred to you, you have to pay a fee.

That’s the existing arrangement, too.

Does it eat into the margin of the consumer business?

No, it doesn’t. It is the same arrangement that they have today and it’s not at the cost. Going forward, both sides participate in the upside.

Your valuation was Rs 5,800 crore because you issued equity valued at that amount. Do you think that it is steal, considering the fact that consumers of this company are getting 16 times price-to-earnings?

I see it differently. I see it from the fact that both companies appointed separate, independent valuers and both companies had their merchant bankers who did a fairness opinion on valuations. And this is a jointly agreed swap ratio proposed by independent valuers and opined by fairness decisions of four large independent entities. So, I think this is fair and shareholders on both the sides stand to gain and everybody stands to gain in this.

Distribution wise, the biggest synergy is supply chain management which gets consolidated and you get synergies out of it and distribution increases by nearly 20-30 percent. How do you translate that reach to growth?

All these products now have access to deeper penetration from day one. So, that itself should give you a synergistic growth. Then you have more products and lines with which the salesman has and you have greater power in the marketplace to be able to win with your brands, with distributions, with synergies. So, there is an immediate benefit that comes with what additional reach in retail outlets that you get, additional distributors that you have now to work with and then going forward, our target is to increase that much further and then look at other categories and continue to drive that momentum forward.

Will you be able to put value to that kind of synergy and how realistic is it? We heard that 2-3 percent of synergies will be coming in. Street believes that this is an aggressive target which you are setting for yourself.

There are initial estimates of 2-3 percent of the combined India businesses. I think these synergies could be more. These are very initial estimates based on the obvious, but I would not say that these are very aggressive.

You started as a plantation business and went into branded tea and now you have gone into consumer products. In the whole process, if you look at valuation from the markets point of view, Tata Global Beverages gets a discount to consumer peers in terms of valuations. Do you see that valuation gap, because now you have a good and broadened portfolio to go to the market and which is a growth portfolio too?

I believe in that. I believe that this is accretive, and a growth story and I am sure all concerned will look at it like that.

Till now, international business used to be a major chunk of your business. Is this also a way to increase your India presence and hedge against the international slowdown?

It is a fact that Tata Global Beverages is roughly 50-50 businesses abroad versus India. This will immediately change the ratio on day one itself. If India business is 49 percent of the revenue, we believe this will immediately become 61 percent. But it’s also about growth. We are pursuing growth. If we see growth opportunities in India and we have our strengths also here. We don’t look up on it therefore as the fact that our international business proportion shrinks. We are equally committed to grow our international businesses in an appropriate manner but you won’t get the kind of growth that we will get here. Overall for the company, this is a much better opportunity and we stay committed to our international power brands such as Tetley. We stay committed towards our B2B businesses such as Tata Coffee Ltd. where we have expanded the capacity with a Vietnam factory. We stay committed with our joint venture companies like Nourish Co and Tata Starbucks in India. So, for us all that remains plus there is this a new exciting consumer platform that opens up.

Tata Chemicals, in its May analyst call, had earmarked Rs 5,000 crore as the revenue target for consumer business alone with a major chunk coming from its salts, spices and others. Do you think the same target will be met or are you going to realign some bits whenever the entire merger consummates?

So that’s the plan which the management made. Similarly, Tata Tea and Tata Global Beverages has its medium-term plan but those plans were made by its respective teams. Now when they all come together in one entity of Tata Consumer Products Ltd., we will re-look at those plans and see that if those are the standalone plans made in this merged entity and with what synergies get unleashed, we will be working on a revised plan.

Are you looking at potential consumer brands in the Indian market?

Too early to say that but of course we look to broaden our growth. Hence, it’s the consumer space that we will be looking at.

What is the kind of growth you are looking for this entire consumer space? We have seen a slowdown in consumption. Are you seeing that as a hiccup?

I think it’s a blip. I look at the trend and I believe in the trend of the FMCG sector, which is roughly Rs 5 lakh crore today. I believe it will grow with a CAGR of 14-16 percent. So, I look at the opportunity in that way. And the news reports or whatever the recent reports of slowdown in the consumption sector is a blip, according to me. So, we don’t think that worries us. In fact, the only feeling everybody has in the organisation today is great excitement and eagerness to unleash synergy.

Do you expect the entire thing to be over by the end of the financial year?

We have to go through stock exchange clearances, National Company Law Tribunal and shareholder approvals. Some of these are not directly in our control but we believe six to nine months approximately should be a fair time frame.

What is your rationale on keeping the Tata Coffee and Tata Beverages separate? One is B2B and other is B2C. Tata Coffee also supplies to you and to Tata Starbucks. So, what is the rationale against consolidation of these entities?

There are lots of synergies that Tata Coffee brings to us because we have branded coffee ambitions and with Tata Starbucks, we have a great play, and increasingly Tata Coffee is becoming more and more of a significant supplier to Tata Starbucks and we believe that there is a lot of value in that company.

So, why is it not getting absorbed or merged with the parent company? It brings in more synergies as you said.

I don’t see why it cannot continue to operate the way it does because it is only adding value to us. So, to me that is not a question that we have looked at and neither does this deal touch any of those entities.

What is the Tata Starbucks expansion plan?

Both Starbucks as well as us don’t give forward-looking plans and comments on it.

How was the year for them?

The year was very good, and the rate of store openings has increased. Now that the base has been set and we have consolidated our learnings in terms of what does it takes to open more and more stores and stay profitable at store level and how do we get good same store sale increases.

Are you seeing a sequential increase in same stores sales growth?

Yes. We are very satisfied and it’s a success story for us. Brand is very strong. So, for us we are very happy with the way venture is going and so Starbucks is very happy. They have called it one of their future growth markets and they have actually even said that the rate of growth at this phase of entry into a new market is one of the fastest that India has given.

Also read: The Valuation Question In The Tata Chemicals-Tata Global Deal