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-CRISIL maintains ratings on Tata Chemicals after British Salt acquisition.

BANKING AND CREDIT NEWS-December 22, 2010--CRISIL maintains ratings on Tata Chemicals after British Salt acquisition(C)2010 M2 COMMUNICATIONS http://www.m2.com

22 December 2010 - India's rating agency CRISIL said Tuesday it would keep the rating on the short-term debt programme of Tata Chemicals Ltd (BOM:500770) at P1+ following the announced acquisition of British Salt Ltd.

Rs.1 Billion Short-Term Debt Programme P1+ (Reaffirmed)

CRISIL has reaffirmed its ratings on the short-term debt programme of Tata Chemicals Ltd (Tata Chem) at 'P1+'. The reaffirmation follows Tata Chem's announcement on December 20, 2010 that its wholly owned subsidiary, Brunner Mond Group Limited (BMGL), has signed an agreement to wholly acquire British Salt Ltd (British Salt), a leading manufacturer of pure-dried vacuum salt in the UK. The total cost of acquisition is around Rs.6.5 billion and would be funded entirely by debt. CRISIL believes that the acquisition will support Tata Chem's already strong business risk profile, giving the company an access to the UK salt market, besides securing critical raw material (brine) supply for the soda ash operations at BMGL. In CRISIL's view, the acquisition will lead to lower raw material costs, and also result in assured raw material supply once the existing supply contracts at BMGL come to an end. Furthermore, healthy profitability of British Salt will add to the consolidated cash accruals of Tata Chem. Though British Salt is currently debt-free, the acquisition, being entirely debt-funded, will result in an increase in debt at the consolidated level by Rs.6.5 billion. CRISIL, nevertheless, believes that Tata Chem's financial risk profile will remain healthy over the medium term, supported by strong cash accruals, comfortable liquidity, and adequate coverage of debt repayments.

The rating continues to reflect Tata Chem's strong business risk profile marked by diverse revenue streams, high operating efficiency, and healthy financial risk profile. These rating strengths are partially offset by price volatility and cyclicality in the soda ash business, the highly regulated nature of the fertiliser industry in India, and the relatively high-cost structure of BMG's European operations.

Tata Chem's strong business risk profile is supported by its diverse revenue streams; the company's operations are spread across the soda ash, fertilisers (urea and complex), cement, and common salt segments. The company's business risk profile is also underpinned by low cost of production for natural soda ash, efficient urea operations, and established market position in most businesses. The company is the second-largest soda ash producer in the world, with a total production capacity of more than 5.0 million tonnes per annum (tpa); nearly 60 per cent of the total capacity is for natural soda ash. The cost of production of natural soda ash is significantly lower than the cost of production of synthetic soda ash. Tata Chem's subsidiary in the US, General Chemical Industrial Products Inc (GCIP), enables it to control a significant portion of the global soda ash flows. Integration of GCIP has resulted in significant increase in operating profit and cash accruals for Tata Chem over the past two years. This is despite the weak global economic environment and competition from Chinese manufacturers in the Asian and African markets.

Tata Chem's urea plant has the lowest energy consumption among gas-based plants in its category, with actual usage lower than the pre-set energy consumption norms; the energy consumption has reduced further, following completion of the de-bottlenecking project, and will support its cash accruals over the medium term. Tata Chem is also a key player in the complex fertiliser segment, driven largely by strong position in di-ammonium phosphate (DAP) markets in West Bengal and Bihar. CRISIL believes that Tata Chem will benefit from the new nutrient-based subsidy (NBS) regime, due to established market position and brand in eastern India, and established raw material tie-ups with Indo-Maroc Phosphore SA (IMACID). In 2009-10 (refers to financial year, April 1 to March 31), Rallis India Ltd (Rallis, rated 'AA/Stable/P1+' by CRISIL), a leading agrochemical company manufacturing a variety of pesticides, became a subsidiary of Tata Chem; this has strengthened Tata Chem's market position as an agri-products company, thereby also supporting its cash accruals. Diversity in revenue streams protects Tata Chem from unfavourable conditions in any particular segment, and adds stability to its cash flows. CRISIL believes that Tata Chem's cash accruals will remain strong over the medium term, supporting its business risk profile.

Although Tata Chem had a moderate adjusted gearing (net worth adjusted for amortisation of goodwill over a period of ten years) of 1.28 times as on March 31, 2010, its comfortable liquidity and adequate coverage of debt repayments support its financial risk profile. The company's debt protection metrics are expected to remain comfortable over the medium term on the back of strong cash accruals. CRISIL, for this rating exercise, has not factored in Tata Chem's proposed brownfield expansion project at Babrala (Uttar Pradesh) of around Rs.40 billion, as the plans are still being finalised. Nevertheless, CRISIL believes that Tata Chem's financial risk profile will remain healthy even if the company contracts debt to fund the project.

However, Tata Chem's soda ash business is vulnerable to imports and volatility in international prices. Other risk factors include the regulated nature of the fertiliser industry, and large working capital borrowings to fund subsidy receivables from the Government of India (GoI). CRISIL believes that the fertiliser industry will remain exposed to developments on the regulatory and government policy fronts over the long term. Tata Chem, in order to close down the Netherland operations of BMGL (because of challenging operating environment), has recognised impairment loss of Rs.1.51 billion for 2008-09 and Rs.349 million for 2009-10, and restructuring costs of Rs.902 million for 2009-10.

About the Company

Tata Chem was incorporated in 1939 to manufacture soda ash and related chemicals, including sodium bicarbonate, caustic soda, and bromides. The company commenced operations in 1944 with a 30,000-tpa plant in Mithapur (Gujarat). Over the years, it has expanded its soda ash capacity to around 917,000 tpa. The company entered the vacuumised salt business in 1986. Its Tata Salt brand is the leading iodised edible salt brand in India. It also has a 440,000-tpa cement plant in Mithapur, which was set up to effectively utilise the solid waste generated during soda ash production. Tata Chem ventured into fertilisers in 1993-94 by setting up a plant in Babrala (Uttar Pradesh) to manufacture urea. In 2003-04, Tata Chem acquired Hindustan Lever Chemicals Ltd, adding complex fertilisers, such as DAP, 10:26:26, 12:32:16, 28:28:0 and single superphosphate, and sodium tripolyphosphate, a key input in detergents, to its product portfolio. In March 2006, Tata Chem completed its acquisition of BMG for a total consideration of Rs.7.98 billion. Tata Chem wholly acquired GCIP for a total consideration of USD1.005 billion in March 2008.

For 2009-10, Tata Chem, on consolidated basis, reported a net profit (before minority interest) of Rs.7.23 billion (Rs.7.59 billion for the previous year) on net sales of Rs.94.48 billion (Rs.126.50 billion). For the half year ended September 30, 2010, Tata Chem reported a net profit of Rs.4.39 billion (Rs.3.13 billion for the corresponding period of the previous year) on net sales of Rs.54.12 billion (Rs.45.74 billion).

British Salt is UK's leading manufacturer of pure-dried vacuum salt products, with around 50 per cent market share in the UK. The company also has brine wells with residual life of 50 years. The company's salt plant is located in Middlewich (Cheshire) and has capacity to produce 0.72 million tpa of salt.

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Publication:M2 Banking & Credit News (BCN)
Geographic Code:9INDI
Date:Dec 22, 2010
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