Demerger of Consumer Segment from Tata Chemicals: How beneficial is it?

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• An overview of how the scheme of demerger would be operational.
• Impact of the proposed scheme of mergers on both the demerged and the resulting company.

Tata Chemicals Limited’s (TCL) proposal to demerge high return bearing Consumer Products division and merge into Tata Consumer Products Limited (TCPL) (formerly Tata Global Beverages), finally got underway on 5th March 2020. The scheme of arrangement was undertaken to enable the Demerged entity  (Tata Chemicals Limited) to focus on its Basic Chemistry Products and Specialty Products business and to integrate the Consumer Products business activities undertaken by both, TCL and the Resulting company, under a single entity. Henceforth, demerger would include sourcing, packaging, marketing, distribution and sale of vacuum-evaporated edible common salt, spices, protein foods and certain other food items and products. Salt manufacturing facility, Basic Chemistry Products and Specialty Products business will continue to remain with TCL. However, salt manufacturing facility would still be providing the products to TCPL through inter segment transfer with agreements to share the gain on potential rise in TCPL’s sales realisation in future.

The pie charts above depicts the operating segments by revenue for TCL before and after the demerger. Post demerger, TCL is now largely a Chemistry oriented business with portfolio focussed on its Basic Chemistry Products, Specialty Products and other related products like highly dispersible silica, lithium battery and nutritional supplements. Going ahead, the management intends to rapidly invest and expand the Speciality Product business (nutritional supplements, silica, lithium ion batteries) and take the ratio to 50:50 while also plans to enhance the Basic Chemistry segments reach to diversified geographies. Established Tata brands like Tata Salt, Tata Sampann and Tata NX which was part of Consumer Product segment under TCL would now be merged with TCPL. The charts below reflect the segment wise proportionate share of different brands under Tata Global Beverage Limited both before and after the scheme of merger.

Turnover of demerged Consumer Product division as on March 31, 2019 was INR1,847 crore which constituted ~16% of the consolidated revenue TCL and ~18% (INR 314 Crores) contribution to operating profits. The addition of this division to TCPL would synergise the overall worth of TCPL both in terms of revenue and contributions. This would further broaden the geographical diversification of TCPL and provide access to over 200 million households, over five million retail points making it one of the largest consumer footprints in the country. The table below demonstrates the financial impact of the transaction both pre and post demerger of TCPL (formerly Tata Global Beverage Limited), exhibiting the increase in revenue and EBITDA margin post-merger of consumer products segment of TCL into Tata Global Beverage Limited.

However, the demerger of the consumer product segment will have a subdued impact on both revenue and EBITDA margin of Tata Chemicals Limited as the demerged segment contributed the highest EBITDA margin of ~17% as on March 19. The impact of the same has been depicted in the table mentioned below which highlights the post demerger impact on the company (TCL).

On a longer term, though the deal demerges the high growth consumer segment from TCL, it would assist the company  in concentrating as well as deploying resources to scale up its chemical portfolio towards high margin products. In addition, the remainder business is set out to be an entirely chemistry-focussed entity, wherein the company plans to expand its specialty product business. The deal would also help the resulting company to expand its product portfolio in fast moving consumer goods categories both in India and abroad. Also, the merger of consumer product segment in Tata Beverages would increase the consumer footprints in India and abroad thereby spreading the reach to varied households.