Prices to remain stable, input cost may ease: Tata Chem

R Mukundan, managing director, Tata Chemicals told CNBC-TV18 that prices are expected to remain stable going ahead and the company is seeing a slight easing in input costs. 

"While in the dollar term the input costs have come down, if you convert them to rupee terms they haven’t come down. So, internationally we are certainly seeing that there is a bit of easing of input cost and prices are stable," he added. Margins are also expected to remain stable going ahead. However, due to the slender decrease in input costs they might expand by one or two percentage points. Further, Mukundan sees consumer and inorganic industrial chemical business witnessing 6-8% revenue growth in the current year. But, margins in fertilizer business may take hit going ahead. Below is the edited transcript of Mukundan’s interview with CNBC-TV18. Also watch the accompanying videos. Q: The government has imposed anti-dumping duty on caustic soda and soda ash imports? How does this impact you? A: We don’t see any major difference. I just see this was something also on soda ash and this move was in the offering for the last six-seven months or so. Our prices move in tandem with import parity pricing and we adjust it from time-to-time. The only big move which has happened is the issue related to the rupee depreciation. To that extent, there was some adjustment done and that’s where it will be. What it will do certainly is that the pricing pressure which will come due to oversupply in some markets and especially out of China where they would be having oversupply because their own economy is slowing down that pressure on the Indian manufacturing will come down. They don’t sell at a marginal cost. It will just protect the Indian industry for the temporary period through the period of readjustment as we are going through. Q: In that case how is the demand-supply balance panning in both these chemicals? Is supply better matching demand or is there scope to raise prices? A: The prices will remain stable. What we do see is in fact a slight easing of input cost which is going to help us a bit. But what has really happened is while in the dollar term the input costs have come down, if you convert them to rupee terms they really haven’t come down. So internationally we are certainly seeing that there is a bit of easing of input cost and prices are stable. I am just giving an outline up to let’s say end of the year, which is end of the calendar year. We have annual contracts with most of the customers. We will see re-alignment of price along with the cost. So, we will have to probably re-align so the margins may slightly come back to what normal margins would be. Q: Your margins actually saw a bit of a deceleration in Q4 on a YoY basis as well as sequentially, but you managed to maintain it for the entire FY12 on a consolidated basis, at around 15% odd. Give us a sense in terms of how exactly the margin picture will pan out for you in FY13 then? A: Margins would remain stable, same as last year with a slight expansion of maybe one or two percentage points because input costs have come down. That’s only in the contracted segment. The non-contracted segment would remain more or less stable. Q: Your capacity utilization basically in the North American markets or facilities that we understand has fallen in Q4 even as you brought in new capacities. Just give us a sense that for the North American markets in particular how exactly do you expect utilization to pan out? A: I don’t want to make a forward looking statement. Fundamentally, we do believe that the decline in the utilization was more due to operational issues which we will be overcoming by the middle of next quarter. We do believe the utilization rates would remain about the same during this quarter. Speaking about the Q1 which is the current quarter, I had already made a statement at the end of the quarter four that the fertilizer segment is the one which is going to see a sharp contraction in margins with the increase in input costs for both phosphoric acid as well as with the dollar appreciation and we will not be able to pass on those price increases to farmers. Some of the price increase has been passed down to farmers, but not all of it. _PAGEBREAK_  There has been a margin compression for all the DAP and PK manufacturers, at least for us I can say that. To that extent I think Q1 is going to be extremely muted. On top of that I think a lot of the consignments which came in there has been a sharp rupee appreciation. So you will also see some foreign exchange losses being booked by companies which would also pull down the margin in the fertilizer business quite sharply. Q: How much maybe the margin contraction in fertilizers? A: Some players may even report negative margins, so we should be prepared for that. It maybe a temporary phenomenon for one quarter, so for that I don’t think we would be crying hoarse about. But the issue is that the decline in the rupee rate was very, very sharp. Some of the hedges just came off and some of us are going to face severe pressure because of that issue. Q: What is the overall impact of rupee depreciation for you? Is it only a negative impact because of the mark-to-market losses? A: I don’t think so. We do expect rupee to remain more or less around this same level. We don’t see any triggers to let rupee move in any other direction other than where it is. There can be a marginal appreciation, but it’s not going to be anything big. We don’t see any policy triggers from any quarter coming despite all the changes we have heard about it. We hope it comes, but we are preparing ourselves that it may not come. So that’s a reality with which we are working. As far as we are concerned, if you look at mark-to-market we have got a open loan position which becomes due for repayment in next year and the year after next two years. The current year is fully hedged and that is about USD 275 million which will be mark-to-market losses. As far as the trading quantity is concerned, they are clearly mark-to-market. As we start selling these products in the market those losses will unwind themselves. Q: Are you completely hedged for this year then? Have you already incurred costs on these hedges? If you have, can you quantify them for us? At what exchange rate level are you actually exposed for possibly FY13-FY14 then? A: No, not that way. If you look at total foreign currency loan which we have, our ECB is about USD 450 million, of which what becomes due is about USD 175 million which is fully hedged. Around USD 275 million is open. That’s where for every rupee depreciation we get a Rs 27.5 crore hit. Q: The Kolkata Port is calling for expression of interest to build captive jetties? Give us a sense on whether you are actually interested in that? What sort of impact will it have on your margins if any? A: We are examining all the parameters of this. One of the problems in Haldia has been the whole issue related to the draft in the port and this is a welcome move. Our team is studying it and any move to improve logistics we would study and do what is needful. It’s something which we have been looking forward to. But I can’t make a comment whether we will participate or some other companies will participate. We have seen that this is a good move. We will examine the pros and cons of this. Q: Finally can you live us with how the revenue growth will shape up in the current year? A: In terms of revenue growth, one piece of the business which is our consumer business and our inorganic industrial chemical business they continue to grow at anywhere between 6-8% growth. They will certainly tend to grow. The issue for us is going to be on the fertilizer side, where urea will show a marginal uptick, but the complex fertilizers will continue to face pressure. I don’t want to say what will be the revenue in rupee-dollars, because that has lot of foreign exchange and other elements involved, but in tonnages it’s going to shrink. In terms of margins it’s going to be just wafer thin. Whatever we were seeing of per tonne margins are going to disappear in that business. That’s the scenario for the current year.