Stock Review: Tata Chemicals

The acquisition of the UK-based company will secure long-term supply of the key raw material for manufacturing soda ash

Tata Chemicals, the world's second-largest soda ash manufacturer, has inked a deal to acquire British Salt, a soda ash raw material maker in the United Kingdom (UK), for £93 million (around `650 crore) through its UK-based subsidiary, Brunner Mond. The acquisition is expected to be completed in the next 3035 days and will be funded through debt finance against assets on a non-recourse basis to Tata Chemicals.

The move augurs well for Brunner Mond, which will be able to secure long-term supplies of a key raw material for manufacturing soda ash. The supply contract with the UK-based Ineos is set to expire in 2016. The renewal would have led to a substantial increase in sourcing costs for brine (salt water).

Brunner Mond contributed 19.21 per cent to Tata Chemicals' total revenues of `9,543.79 crore in 2009-10. Soda ash, which contributed 45 per cent to consolidated revenues of Tata Chemicals, is witnessing firm demand in the domestic market, led by FMCG (fast moving consumer goods) majors in the detergent and glass industry.

The demand for glass has risen at a compounded annual growth rate (CAGR) of 11.5 per cent for the past 10 years and is anticipated to grow at a CAGR of 11 per cent over the next 10 years, reckon analysts.

The global demand for soda ash, which declined six per cent during 2009-10, is likely to grow seven per cent in 2010-11, according to industry estimates. Hence, Brunner Mond's revenues, which declined 12 per cent to `1,834 crore in 2009-10 due to poor global demand and plant shutdown in the fourth quarter, are likely to turn around going ahead.

British Salt, which is estimated to report revenues of £30-35 million (over `210 crore) in the current financial year, will also provide a boost to Brunner Mond's top line, with earnings before interest, taxes, depreciation and amortisation likely to grow £15-17 million (over `105 crore).