New gas ricing regime will help increase domestic output, says Tata Chemicals and calls for increase market price of urea.
R Mukundan, MD, Tata Chemicals hailed government's recent decision to increase the natural prices to USD 8.4 per mmbtu from April 1, 2014 and said that now government should cut down on urea subsidy and increase urea prices.
According to him, high subsidy on urea has led to misuse of fertilisers and overuse of fertiliser is impacting soil productivity as well.
The company gets its share of gas from Administered Price Mechanism (APM) and Regasified liquefied natural gas. After the drop in gas production from KG6 basin, the company has been facing a shortfall. However, Mukundan is hopeful that the new gas pricing mechanism will boost production and hence that will sort this shortage.
Below is the verbatim transcript of the interview
Q: How much gas does Tata Chemicals procure from the Reliance Industries (RIL) Krishna-Godavari (KG)-D6 and are you receiving full gas as per your requirement or agreement? Is there any shortfall?
A: In terms of our gas pool we receive it from the Administered Price Mechanism (APM) KG basin and we also have regasified liquefied natural gas (RLNG). Of late, while there has been a shortfall, it has been met by RLNG largely. Hopefully with this new pricing regime which has come in and if the output does increase, that shortfall should be out and it should be completely met with domestic gas whether it be APM or RLNG gas.
Q: Since this is the bigger emotional issue now. How much do you think would be a reasonable price for gas since you are such a big user?
A: It is very difficult to say. It is fair to say that the prices have to move up because of inflationary pressures and other cost pressures, which are there in the system. So, I would say now that we have decided the price, we should move on from here. Then we should say what does it make to make other sectors vibrant rather than sitting and discussing about this price hike itself. As I said if fundamentally the gas output does increase, the domestic gas availability at this price does improve, it would to a large extent substitute RLNG, which would reduce the impact on the companies, which buy gas.
Secondly, I think the issue which government needs to also do is to say that certain arbitrary pricing issues, which were in urea for example above cut off reimbursement of urea was kept at 85 percent of import parity, that needs to be removed.
Q: The other point that we want clarity on is that Finance Minister (FM) spoke about only fixing the output price and not the input price, which the fertiliser and power sector would get. What is your sense, is he talking about subsidy burden going up, is he hinting to something more bigger, which is a possible decontrol, possible hike in urea prices. What do you understand from his statement?
A: Fundamentally, I think more than looking at what kind of subsidised price a gas will be given to a sector, which is going to again introduce lot of let us say artificial pricing mechanisms which are not necessary in the interest of the industry. I would think government should move in terms of reducing the subsidy on urea and increase the market prices of urea, which I think is a fundamental step. Also government needs to ensure that fertiliser industry is given the highest priority and within the highest priority it is supplied gas only from domestic source and lastly, this 85 percent above cut off needs to be removed.
Q: You did say that there should be a price hike and subsidy should be cut down. By what extent do you think there should be a urea price hike or you see if the extent of urea price hike, with the gas price hike that has been announced, that is basically a virtual doubling of gas price. What do you think would be the extent of urea price hike?
A: It is quite astounding that this sector has not seen any price increase on the output side for many years. If you look at the urea price today, if one were to cost it, it is almost going to be a three times or four times the market price, which the farmer ends up paying. This is the kind of subsidy we are giving to farmer, which is leading to misuse of fertiliser, which is leading to overuse of chemical fertiliser and is not improving the productivity and soil efficiency. The government should look at it holistically. I think some element of subsidy is warranted, but not this kind of percentage of subsidy, which is absolutely a criminal waste of both governments’ resource as well as brings in bad market practices.
Tata Chemicals stock price
On September 19, 2014, Tata Chemicals closed at Rs 397.65, down Rs 1.35, or 0.34 percent. The 52-week high of the share was Rs 421.30 and the 52-week low was Rs 236.40.
The company's trailing 12-month (TTM) EPS was at Rs 19.83 per share as per the quarter ended June 2014. The stock's price-to-earnings (P/E) ratio was 20.05. The latest book value of the company is Rs 223.79 per share. At current value, the price-to-book value of the company is 1.78.
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