What started as an exercise at backward integration is increasingly becoming mainstream business at Nirma Ltd. The company’s acquisition of US-based Searles Valley Minerals (SVM) would add substantially to the turnover of the company’s industrial products portfolio, which includes soda ash and linear alkyl benzene (LAB). SVM is one of the five natural soda ash manufacturers in the US and has a combined production capacity of more than 1.9 million tonnes across products such as soda ash, sodium borates, boric acid and sodium sulfate.

Nirma had set up plants to produce LAB in 1997 and soda ash in 2000, mainly as attempts at backward integration, as more than 60% of the total cost of production was on account of these raw materials. But soon Nirma began producing more than its captive requirements. An associate company’s acquisition of Saurashtra Chemicals Ltd made the Nirma group the largest soda ash manufacturer in the country, ahead of Tata Chemicals Ltd. Currently, only about 45% of its soda ash production is used for captive consumption.

Still, only 26.5% of the company’s turnover comes from soda ash and LAB, and the majority (64.6%) continues to come from detergents and toilet soaps. The SVM acquisition will alter this equation substantially in favour of industrial products. Nirma expects annual revenues to reach Rs3,500 crore post-acquisition, fromRs2,290 crore in the year till March 2007. Back-of-the-envelope calculations reveal that the share of soda ash and LAB could increase to about 47% of the firm’s revenues, as a result of the acquisition. As it is, the consumer products business is under pressure owing to competition. In the July-September quarter, the company’s revenues decreased 5% and operating profit fell by nearly one-third to Rs67.4 crore. The timing of the acquisition, therefore, augurs well.

Soda ash is produced synthetically from limestone and salt in India, while SVM enjoys natural soda ash deposits. The cost of production is much lower for natural soda ash manufacturers such as SVM because the processing and labour costs are less. Nirma’s move is almost on the lines of Tata Chemicals’ purchase of UK-based Brunner Mond in December 2005. That acquisition had made Tata Chemicals the third largest player in the world, while the SVM buy would put Nirma among the world’s top seven soda ash manufacturers. Apart from giving these companies access to low-cost natural soda ash, it also gives them an entry into new markets.

While the all-important acquisition price of the SVM transaction is not known, the markets seem to have come to the conclusion that the deal is an immensely positive development. The stock rose 8.4% after the announcement, but note that it had risen 35% in the previous seven trading sessions. Average daily volumes had shot to 350,000 shares in these sessions—up more than 20 times from the rest of the year. Evidently, news of the acquisition had leaked more than a week ago, something the Securities and Exchange Board of India may be interested in investigating.

Money supply peaks

Reserve Bank of India governor Y.V. Reddy said on Tuesday that “a major issue exercising our mind (is) related to monetary aggregates and liquidity." That’s because, while credit growth has shown signs of slowing, money supply growth has not. Instead, M3 growth has been steadily rising recently and its year-on-year growth rate of 23.8% as on 9 November is a multi-year high. In the same period last year, M3 was growing at an annual rate of 18.7%. As the chart shows, money supply growth has accelerated sharply over the past five years.

A look at the sources of funds shows that bank credit to the commercial sector has grown by 21.9% year-over-year—lower than the 25.4% growth notched up in the same period last year. There’s been a rise in bank credit to the government, but that doesn’t amount to much. The main reason for the big rise in money supply has been the increase in net foreign exchange assets of the banking sector. In the year to 9 November, these increased by 37.7%, or Rs29.99 trillion, against a 16.4% year-over-year rise as on 9 November 2006, or Rs1.11 trillion.

Does that mean we’re likely to see a deceleration in money supply growth in future, as foreign institutions continue to sell or even if foreign inflows dwindle? In other words, the currently high M3 growth rate is a reflection of the past. M3 growth has been accelerating, picking up from 21.8% on 12 October, at a time when foreign institutional investors (FIIs) were pumping in billions every week, to 23.8% at a time when FIIs began selling. The speed of M3 growth is also due to a base effect because money supply growth was slowing down around the same time last year. The hint of which way the wind is blowing is the rupee, which is at its weakest in more thana month.

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