Tata Chemicals -Securing raw material supply through British Salt acquisition:: Kotak sec

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Tata Chemicals (TTCH) 
Others 
Securing raw material supply through British Salt acquisition. TCL will acquire
100% of British Salt (BS) for GBP93 mn, which will be funded through additional debt.
With this acquisition, TCL will gain (1) secure cost-effective brine supply and (2)
profitable revenue stream from sale of edible salt of around 0.4 mtpa. With the latter
stream of revenue, we think this acquisition will help improve overall financials of BMGL
which is yet to break even at PBT level since FY2008. We estimate PAT addition of
4.5% to FY2012E consl. PAT. Maintain REDUCE with PT of Rs370.



BS provides secure, cost-effective brine supply
BMGL’s existing 25-year contract with Ineos for supply of brine was set to expire in 2016. In light
of increase in cost of procuring brine from Ineos through contract renewal, BMGL has chosen to
acquire British Salt (BS), the only other producer of brine in UK, although at the cost of increased
debt (BMGL’s current debt is GBP145 mn). We believe a captive source of raw material supply is
important for soda ash and with this acquisition TCL has assured secure, cost-effective brine supply.
According to the company, BS has capacity to supply brine for BMGL’s soda ash operations of 1
mtpa without any major capex.

BS also provides profitable revenue stream from sale of edible salt of around 0.4 mtpa
The acquisition also provides entry into food segment in UK as BS remains the largest supplier
(produces 0.4 mtpa) of vacuum salt in UK with 55% market share and has long-term customer
relationships with leading food, chemicals companies in UK. According to TCL, due to current
capacity underutilization at BS, this revenue stream is likely to continue and will not be substituted
due to diversion of salt for its soda ash operations.

Acquisition will help improve overall financials of BMGL, net addition of 5% to FY2012E EPS
According to TCL, BS had EBITDA of GBP15 mn with PAT of GBP9.5 mn in 2009 largely due to
sale of edible salt. With the above profitable stream of revenue likely to continue, we think this
acquisition will help improve overall financials of BMGL which is yet to break even at PBT level
since FY2008. Without taking into account any synergy benefits, we estimate PAT addition of
around GBP5.5 mn post interest on additional debt (at LIBOR plus 300 bps). This is likely to result
in net addition of 4.5% to FY2012E EPS.

We leave our estimates unchanged
We leave our estimates unchanged and await closure of deal which is expected in Jan 2011E.
Maintain REDUCE with PT of Rs370.