Ruchi Agrawal Moneycontrol Research
One year since the change of guards at Bombay House, the street is abuzz with rumors of restructuring and pulling up of underperformers in the group. Some of it is beginning to take shape with cleaning up of over leveraged balance sheets and exit from non-core non-profitable ventures. Tata chemicals (TCHL) and Indian Hotels (IHCL) are two such Tata group companies where substantial restructuring measures have either been taken, or are in the pipeline, and benefits should flow in sooner or later.
What’s the progress at Tata Chemicals?
After consecutive quarters of low profitability and unrelenting increase in operational complexity for urea and phosphate fertilizer business, TCHL has strategically signed deals to sell off the low-profitability fertilizer businesses to Norway’s Yara and IndoRama Group, respectively. The deals will facilitate deleveraging, in line with management’s aims for a net debt-free standalone business by end of FY18.
In a bid to enhance focus on core businesses, the company has also indicated transfer of all remaining agri business to Rallis thereby, ensuring proper segmentation. It has sold off its stake in Tata Global beverages for approximately Rs 900 crores.
What about the mess at Indian Hotels?
Foray into international waters led to over leveraging and heavy finance costs which have been a major drag for IHCL. In line with the group’s focus, IHCL is also undergoing major balance sheet restructuring to bring focus back to legacy domestic operations. Non-profitable portions of the international ventures are being divested, written down or moved to management contracts. The group is moving to an asset light model to fully leverage on the strength of the brand and ensure sustainable margins.
What’s the progress so far …..
Tata Chemicals Q2 on track
TCHL reported a steady set of Q2 numbers. Although revenues were up only 2 percent YoY at Rs 3462 crores, consolidated EBITDA was up 31 percent YoY owing to operational efficiencies. Segmental performance was a mixed bag with both internal and external factors having major impact on operations. Rallis, North America and Africa businesses were front runners in driving growth and enabled to overcome the friction from the European operations along with domestic consumer business, where the performance remained soft.
But, Indian Hotels Q2 continues to disappoint
Indian Hotels reported a weak set of Q2FY18 numbers on account of a seasonally lean quarter and write downs from international properties, resulting in net loss of Rs 60 crores. The consolidated revenues were down 4 percent YoY whereas on a standalone basis the decline was 1.2 percent. However, the like-to-like revenues, excluding the impact of sell-off of the Boston property was a growth of 1 percent.
Even though consolidated EBITDA margins were weak, there was a 13 percent YoY improvement in the standalone EBITDA margins at 13.2 percent due to savings on employee and operating costs, indicating recovery in domestic business.
The Road Ahead – positive with different timelines
Tata Chemicals – journey to higher profitability in sight
The exit from the fertilizer business would free up working capital locked in due to delay in subsidy reimbursements and provide additional funds for debt repayment and expansion of specialty chemicals and consumer segments. The de-leveraging of the balance sheet coupled with higher revenue from asset light but relatively high-margin businesses will have a positive rub-off on profitability and return ratios.
The management highlighted the current product portfolio in the consumer products business would break even in FY19, and TTCL now plans to introduce new products in order to capture market share. The stock is currently trading at an FY19E EV/EBITDA of 9x. A successful revamp can trigger further re-rating.
Indian Hotels – road to profitability post some speed breakers
Despite restructuring and strategic exits from non-profitable properties, the debt levels remained noticeably high, which in part could be attributable to high working capital requirements. With proceeds from sale of international ventures and the recent rights issue flowing in the month of November, the company has plans to pay off debt worth Rs 789 crores which would lead to a saving of approximately Rs 64 crores per annum on the finance cost front, and would help in improving profitability.
Moreover, with a seasonally robust 2H (more than 70 percent of FY revenues), recovery in occupancies, improving domestic rooms rates (ADR) and RevPARs, rise in domestic leisure spend, renovated properties back in supply and limited further capacity addition, we believe quarters ahead to be better positioned to provide the much required momentum.
While margins and return ratios have been muted for long, we believe with reduced leverage and improved operational efficiency, financials should gradually come back on track. The stock is currently trading at an EV/room of Rs 0.93 crore which is much below industry average and we see opportunity for catching up.
With the winds of change blowing, it will not be long before it touches the laggards of the group. While for Tata Chemicals, the results are lurking, for Indian hotels it is not yet visible. Patient investors with a penchant for turnaround companies should definitely keep these Tata group companies on their radar.
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