What Chandrasekaran’s Third Business Restructuring At Tata Group Means

Tata Group plans to bring its consumer business under one unit as Tata Sons Natarajan Chandrasekaran continues with a business restructuring to simplify India’s largest group.

Tata Chemicals Ltd. will transfer its food and other consumer brands to Tata Global Beverages Ltd.—one of the biggest makers of branded tea and the owner of Tetley, Bloomberg reported citing unnamed people. The boards of the companies are expected to meet today to finalise the terms of the deal, the report said.

This will be the third such consolidation after Chandrasekaran took over as chairman of Tata Sons Ltd. in February 2017. The group has since sold consumer telecom business to Bharti Airtel Ltd. and merged defence arms under Tata Aerospace and Defence Ltd. The conglomerate has more than 100 companies but the bulk of the contribution to revenue and profits comes from Tata Consultancy Services Ltd. and Tata Motors Ltd.

Tata Sons, Tata Global Beverages and Tata Chemicals have yet to respond to BloombergQuint’s emailed queries.

Bringing the consumer business under Tata Global Beverages will lead to synergies by consolidating supply chains. Both Tata Global and Tata Chemicals have similar vendors and dealers, a person aware of their operations said on the condition of anonymity as details are not public yet.

But Tata Chemicals will have to provide salt and chemicals for detergents to Tata Global Beverages, the person said. Salt is a byproduct of soda ash, the core business of the chemicals maker.

Tata Chemicals’ Consumer Business

Tata Chemicals consumer business includes Tata Salt, pulses and spices under the Sampann brand, and snacks business. It also makes Tata Dx branded detergent.

The consumer business accounts for 15 percent of the consolidated sales and 16.4 percent of the consolidated earnings before interest and taxes of Tata Chemicals.

• Tata Chemicals posted a consolidated revenue of Rs 11,296 crore for the year ended 31 March 2019. Its consolidated Ebitda stood at Rs 2,095 crore and profit after tax at Rs 1,395 crore.
• Its consumer business reported sales of Rs 1,848 crore and EBIT of Rs 294 crore for the year ended March 2019.
• For the fourth quarter, food business revenue stood at Rs 479 crore and EBIT at Rs 86 crore.

Tata Chemicals has invested in expanding its consumer distribution network in the last one year as it targets Rs 5,000 crore revenue from the consumer business. “Rs 4,500-odd crore should come from salt, pulses and spices,” R. Mukandan, managing director and chief executive officer of Tata Chemicals, had said in an analyst call after the fourth-quarter earnings. “The balance, Rs 500 crore, will be new categories.”

The chemicals maker valued the consumer segment at a target price-to-equity multiple of 23 times because of its 60 percent return on equity, HSBC said in a May report. That implies an equity value Rs 7,867 crore or Rs 309 per share, a 40 percent discount to listed consumer peers, it said.

By comparison, Tata Global Beverages’ market capitalisation is around Rs 12,870 crore.

What’s Left In Tata Chemicals

While soda ash and salt remain the biggest business, the company also makes specialty chemicals.

Soda ash and salt generate over 90 percent of its operating income and are seen as cash cows, particularly the Indian assets, Deutsche Bank in its May report said. The brokerage is positive on the decision to invest Rs 2,400 crore on capacity expansion—20 percent for soda ash and 40 percent for salt— at its facilities in Mithapur, Gujarat in phases by March 2022.

The company is also looking to enter new categories. Tata Chemicals tied up with Pune’s Centre for Materials for Electronics Technology for recycling batteries. The first trials have been fairly successful, according to a company presentation, and it’s considering commercial applications.

For lithium-ion batteries, the company has partnered the Central Electro Chemical Research Institute at Karaikudi, Tamil Nadu and the Indian Space Research Organisation, Bangalore. ISRO is in the process of transferring technology to Karaikudi, according to a company presentation, and Tata Chemicals will set up a battery-making unit. It’s also building a facility in Nellore, Andhra Pradesh to make essential vitamins and chemicals for the food industry.

Deutsche Bank is apprehensive about the new businesses including pulses and spices, nutraceuticals, silica and possibly lithium-ion batteries. These, it estimated, would dilute return on equity in the next two to three years.