BACK IN THE ’80s, Tata Chemicals mixed iodine with salt to free the nation of goitre, a swelling of the thyroid gland caused by iodine deficiency. Tata Salt was thus born and is today a Rs 712 crore brand. Tata Chem’s next target: fix protein deficiency. Last year, it launched MoPu, or GrowMorePulses, a campaign directed at farmers, encouraging them to produce improved varieties of pulses which are marketed by Tata Chem under the i-Shakti brand. Pulses are the main source of protein among the underprivileged and vegetarians, and as with iodine, Tata Chem wants to boost its consumption in a country deficient in it. The brand has broken even in 12 months. “We started our pulses venture with approximately Rs 80 crore [turnover] last year. This year it’ll be Rs 150 crore to Rs 160 crore. We’ll keep doubling it every year,” says Ramakrishnan Mukundan, managing director, Tata Chem. The company also makes a water purifier, industrial products such as soda ash, and farm essentials such as fertilisers, pesticides, and crop protection chemicals through its subsidiaries Rallis India and Metahelix.
Over the past few years, corporate India has been trying to get its farm-tofork models in place. The Mahindra Group and Reliance have shown interest in bananas, potentially a Rs 36,000 crore market. The Adani group is the biggest exporter of apples, while Ronnie Screwvala, previously a media entrepreneur, is planning a big push with pomegranates.
But branded pulses are new, though regional store brands exist. For some time at least, Tata Chem will be the only player. Demand is pegged around 20 million tonnes per annum, valued at Rs 1.2 lakh crore and growing, nearly one-sixth (3 million tonne) of which is met through imports. Most of the corporate activity in staples has been restricted to wheat flour—ITC’s Aashirvaad Atta (packaged flour) is the largest—and basmati rice, besides sugar. “This year we’ll cross Rs 1,000 crore for the first time with our consumer business (salt, pulses, water purifier). It has the potential to be around Rs 5,000 crore in the next five years,” says Mukundan.
That’s good news for Tata Chem. It has been a laggard in the group as far as returns are concerned. Between 2007 and today, its share price has appreciated by just 40% and dividend per share by 25%. Over the same period, others such as Tata Motors, TCS, and Titan became multibaggers. The relative underperformance of the stock has prompted brokerages to ignore it. “The risk-to-reward ratio in covering the stock is high. We have stopped tracking Tata Chem,” says the research director of a leading brokerage, requesting anonymity. With pulses, Tata Chem may have found its new growth engine.
SET UP IN 1939 AS A SODA ASH and fertiliser company, Tata Chem is the most efficient urea manufacturer in the country, producing over 1 million tonnes. It is also the world’s second-largest soda ash manufacturer. Coupled with fertilisers, this accounted for around 80% of the company’s consolidated sales of Rs 13,655 crore in FY12. Tata Chem has also spent nearly $2 billion (Rs 10,704 crore) to buy soda ash and fertiliser assets in Europe, North America, and Africa over seven years. “Most of our growth in recent years came from the overseas subsidiaries, which we acquired by leveraging the balance sheet of the parent company,” says P.K. Ghose, executive director and chief financial officer, Tata Chem.
Though it is now an integrated fertiliser and crop protection company, with a presence across the agri chain, Tata Chem is in an odd situation. Growth comes from outside India, while the cost of it is borne by the domestic operations. In FY12, India operations accounted for 59% of the company’s consolidated revenue and 71% of its global net profit. “There is no option for us but to grow the Indian business and restore parity between performance and liabilities,” Ghose adds. That’s another reason to enter pulses.
Five years ago, key Tata Chem executives, including economist Yoginder K. Alagh, who sits on its board, and vice chairman R. Gopalakrishnan, identified pulses as an opportunity. As part of Tata Chem’s Golden Agri project, they realised farmers ignored pulses for the more stable rice, wheat, and cash crops. The latest Economic Survey states that in 40 years, per acre yield of pulses increased by only 35%, compared to doubled rice output and a 125% rise in wheat production. Despite rising demand (two-anda- half times demand in 1970), the per capita availability of pulses has reduced by nearly half—it was 31.6 grams per day in 2010, compared to 69 grams in 1961.
A long-term strategy to make a big push in India’s food and staples market was already on the table. Tata Chem is a leader in salt, with a 64% market share. It has grown at a CAGR of 7% since 2008. “Tata Salt is one of the most widely distributed food brands in India, reaching nearly 65 million households. At the other end, our fertilisers and pesticides reach nearly 4 million farmers every season. We decided to marry the two networks,” says Mukundan. The idea: Use the backend of Tata Chem’s farm inputs business to source staples from farmers, and then brand and distribute the product through the Tata Salt sales and distribution channel.
“Our core strength lies in maintaining unique access to the farms and then building a supply chain right up to the last mile. While we would like to associate with modern food store formats, we will also partner kirana stores,” says Mukundan. He adds that the benefit of going to the farmer is quality consistency and a ready supply chain. Then the consumers pull the product and, as long as Tata Chem can sustain a consumer connect, all these stores will need to do is stock its brands. Mukundan expects i-Shakti to be at least a Rs 1,000 crore brand in five years.
Convincing retailers to stock i-Shakti won’t be easy though. “Pulses are one of the most profitable segments for retailers, with margins of around 25%. Selling loose gives them an opportunity to make inventory gains if they can time purchases,” says Ashwini Hiran, chief operating officer, consumer products, Tata Chem. In contrast, i-Shakti comes labelled with the maximum retail price, like any other branded product. That’s why it is available only at 30,000 outlets, a fraction of Tata Salt’s coverage of 1.6 million.
“The trade is always sceptical of new products. But if the brand gets popular, shopkeepers have no choice but to stock it. Tata Chem should focus on creating the brand pull, and everything else will follow,” says Arvind Singhal of Technopak Advisors, a retail and brand consultancy. Hiran agrees, saying that every time a customer asks for i- Shakti, it puts pressure on the shopkeeper to stock it. Tata Chem is ramping up its brand promotion. Meanwhile, another factor that could work in the company’s favour is the portfolio of brands.
Apart from the old favourite Tata Salt, the company has Tata Salt Lite (low sodium salt), i-Shakti salt (solar evaporated salt popular in South India), Tata Salt Flavoritz (India’s first flavoured table salt) and Tata Salt Plus (salt fortified with iodine and iron). A portfolio of products gives the company some leverage with trade. “In the last few years we have spent a great amount of time and money in filling gaps in our portfolio. All these initiatives will now start paying off,” says Ghose.
JANAKIRAMAN WAS JUST ANOTHER FARMER in Tamil Nadu’s Pudukkottai district. Growing black gram for many years now, he never thought his income could improve without expanding acreage. That was until Tata Chem launched MoPu, under which Rallis India sells top-quality black gram seeds and provides know-how on increasing yield per acre. Rallis would buy the yield at market price and send it for processing and packaging. Janakiraman’s yield from his 2 acre farm increased from 450 kg an acre to 600 kg, and his monthly income, by Rs 18,000. He also didn’t have to lug his produce to the mandi (town market) and negotiate a price.
Scores of farmers across Maharashtra, Karnataka, Tamil Nadu, and Punjab are becoming part of the Tata Chem chain. The company aims to have 50,000 members by the end of this fiscal. Mukundan says, unlike companies that only sell products to the farmers, Tata Chem’s is a more holistic relationship as it buys output back from them as well as the traditional mandis. This gives Tata Chem the reach and makes for a privileged relationship, going back and forth across the supply chain. KPMG partner Ramesh S., who heads its food and agri practice, says a two-way channel always wins over a standalone network, given the number of intermediaries involved in an agri chain (farmers, traders, transporters, wholesalers, etc.).
However, in selling staples, margins are lower (around 5%), though volumes are higher. The levers here are different from other businesses. Being a traded commodity, the prices of pulses fluctuate, so there’s the risk of inventory losses if the company doesn’t get the supply chain right. Wholesalers and retailers typically play the price volatility game by buying low and selling high. Tata Chem doesn’t want to play it, therefore it has to get an optimal mix of post-harvesting sourcing from member farmers and spot buying from mandis.
Food can be one of the largest industries for Tata Chem in India. About 44.4% of an urban household’s expenditure, and 57% of a rural household’s, is on food, says the National Sample Survey Organisation. According to Central Statistical Organisation estimates, consumer expenditure had a 57% share of India’s gross domestic product (GDP) in FY12.
The company has its task cut out. Around the time i- Shakti was launched, the foods division started marketing Flavoritz. It has also entered the health foods space—has set up a factory in Chennai to manufacture flavours and nutraceuticals (food with nutritious additives), and polyols, an artificial sweetener used by foods and pharma companies. ITC, Dabur, Nestlé, and Unilever are among the big buyers.
Analysts are optimistic too. “It is in a sweet spot right now and could rapidly scale up the foods business. Pulses alone are expected to be worth Rs 3,000 crore,” says Gauri Anand, equity analyst at MF Global Sify Securities, who has a buy rating on the stock. Others expect Tata Chem to eventually turn into an aggregator of non-perishable foods for large retailers and foods companies. “As its sourcing volumes get larger, a consumer goods company or a retail chain will find it more economical to ride Tata Chem’s network than invest time and money in creating a sourcing network of its own,” says Ajay Parmar of Emkay Global Financial Services.
BUT SOME HURDLES exist. Agriculture being a state subject, a company entering the space has to modify its sourcing and selling strategy depending on each state’s needs. This is one reason why retail major Spencer’s, which gets 7% to 8% of its revenue from food-related products, buys most of its farm produce from middlemen. Mukundan also points to how states restrict the limit for stocking pulses, which is an essential commodity, to just 0.2% of what is required by a healthy supply chain. “It’s not even a truckload. The whole idea was to stop hoarding, but it runs counter to supply chain efficiencies.”
Regulations, however, are beginning to change and many individual states have started tinkering with the Agricultural Produce Marketing Committee (APMC) Act, which governs the way farming functions in respective states. In April this year, Maharashtra amended its APMC Act to allow farmers in the state to sell their produce to anyone. The Union government has also floated a model APMC that makes it easier for companies to buy from farms. Tata Chem has already signed up with farmers in various states following the amendments.
Last month’s announcement on foreign direct investment (FDI) in multi-brand retail will also help. “We have an initial understanding of the kind of commodity risk this business has, because of price fluctuations. You can’t move the market price of branded products as frequently as commodity prices, so you have to manage that risk,” says Mukundan. But with the entry of international companies that have mastered risk management, he adds that there will be a lot of learning not just by looking at competition, “but [by figuring out] how we can cooperate to ensure risks are better managed”. Once risk is managed better, the volatility in the system is reduced. Also, if the capital, as well as technologies, move to India because of FDI, the sector stands to benefit. Tata Chem can hope its efforts and investments in pulses will be worth its salt.