Why Tatas and Birlas are exiting fertiliser business

Agriculture

Shishir AsthanaMoneycontrol Research

When two of the country's largest, oldest and most reputed industrial conglomerates decide to exit from a sector, it is time check if the best days for the sector are over. The Tatas and Birlas are exiting from the fertiliser sector and that too in a short span of time.

Tata Chemicals sold its urea business to Norway’s fertiliser and chemicals major Yara for Rs 2,670 crore, in what it termed as a move toward value-unlocking.  At the time of its sale R Mukundan, Managing Director, Tata Chemicals had said, “The sale was part of our strategy to cap the capital exposure in the fertiliser business.” The company, however, continued to own the brands Paras, TKS and Daksha and its exposure to complex fertilisers.

The Babrala plant which produced urea generated revenue of Rs 2,244.50 crore and earnings before interest, taxation, depreciation and ammortisation (EBIDTA) of about Rs 230 crore in FY16. The unit was thus sold at 11.6 times its operating profit or just above its revenue earning capacity. The Tatas used the money to invest in consumer and inorganic chemical business.

Even Aditya Birla group's recently-merged Aditya Birla Nuvo is all set to sell its fertiliser business, which can fetch around Rs 3,000 crore. The move is to help consolidate the business of the group into core activities. The business generated a revenue of Rs 2,164 crore in FY17 and EBIDTA of Rs 153 crore.

The Birlas have been discussing the sale of the unit for some time now, however, it seems to have received some suitors for its unit now. The Birla unit also manufactured urea, just like that of Tata Chemicals.

Why are the top two industrial houses planning to exit fertiliser business?

A look closer would reveal that the Tatas are not exactly exiting their fertiliser business but only the one which was producing urea. Birla’s unit was mainly a urea unit.

Urea has been one of the most controlled and politically sensitive commodity. Being a controlled fertiliser, its price has not been changed for over a decade despite sharp changes in input cost. As a result of its control and political interference no new urea manufacturing capacities have not been set up in a decade.

Apart from no control on the pricing of finished product, fertiliser companies were not getting paid the subsidy amount by the government. As a result most companies were saddled with high levels of debt.

But this environment has been existing for over a decade, so what made the companies exit the business now, especially when the government of the day has taken major initiatives to make the sector transparent.

Direct Benefit Transfer (DBT), expected to be launched soon, would result in subsidy being disposed of in days as compared to 9-12 months earlier. This itself would have been a big reason to stay invested in the sector and capitalise on their market presence and low cost manufacturing base.

However, there seem to be other reasons behind the exits.

First is the reason which the companies themselves are saying, that is as the economy opens up, and they would like to utilise their capital in a better way by investing in higher growth areas. This makes a lot of sense as urea growth is expected to be flat on a best case scenario.

There is a huge price differential between urea (nitrogenous) and other fertilisers. Non-nitrogenous fertilisers are sold at over three times the price of urea. This resulted in indiscriminate use of urea which in turn affected the quality of soil and thus the farm yield.

The government’s use of soil card coupled with data of fertiliser consumption is expected to correct the usage of various fertilisers. Districts where DBT was tried out have shown improvement in the consumption of fertiliser in favour of non-urea fertilisers. In fact consumption of urea in these districts have fallen down.

Further, pilferage of urea to other usage has also come down. With the use of DBT and Aadhaar consumption of urea can be tracked and noted if a farmer is buying it or some other user who is planning to take advantage of the subsidy to use it for some other purpose. In fact government is on record saying that subsidised urea was smuggled to neighbouring countries where it is sold at import parity price.

Since technology and smart usage is likely to bring down consumption, it makes sense for these conglomerates to exit from a business which would, at best have marginal growth.