Is Tata Chemicals Ltd’s consumer business worth its salt? Shareholders of the company, the owners of the iconic Tata Salt division and other consumer businesses, will be inclined to say no. After all, the business has been valued at about 5,800 crore (using Tuesday’s share price) for its proposed sale to Tata Global Beverages Ltd, or about three times annual revenue.

Some analysts have valued Tata Chemicals’ consumer business at more than four times revenue at 7,500 crore. Expectations from the sale, which has been in the works for more than a year, were also running high after the company started reporting impressive growth and profitability metrics for the consumer business.

While the general perception is that Tata Chemicals’ mainstay salt business is saturated and offers low growth prospects, it turns out that the company reported 22% growth in revenues for the consumer business in FY19.

What’s more, earnings before interest and tax rose by 33% to 314 crore. The profit margin was at 17%, up from 15.5% in FY18. Salt volumes rose 9%, far higher than low single-digit growth rates for the industry as a whole. Besides, the company is in the middle of capacity expansion in the salt business, with production estimated to increase by about a third to 1.45 tonnes by FY23.

Against that backdrop, the lower-than-expected valuation is akin to throwing salt on the wounds of Tata Chemicals’ shareholders.

However, shareholders of Tata Global Beverages needn’t rejoice. It may have acquired Tata Chemicals’ salt and pulses business at a far cheaper valuation compared to other fast-moving consumer goods (FMCG) stocks, but salt, spices and pulses aren’t typical FMCG products. They may be fast moving, but lag when it comes to pricing power and profitability metrics.

It’s also important to note that Tata Chemicals has retained the salt manufacturing facility, and would be supplying salt to Tata Global Beverages under a long-term salt supply arrangement. As such, they may need to take the seemingly cheap valuation with a pinch of salt.

Analysts at Systematix Shares and Stocks (India) Ltd, however, say in a note to clients that the deal will be earnings per share (EPS) accretive for Tata Global Beverages’ shareholders. “The transaction will be EPS accretive for Tata Global as it adds 25% to revenue and 50% to its net profit for a 46% dilution in equity," said the note.

Even so, it will be wise for investors to take a look at reported profits post the completion of the merger before coming to conclusions about earnings accretion.

From a strategic standpoint, the merger makes immense sense as it combines the strengths of the two separately run consumer businesses. This should result in better growth prospects for both the beverages business as well as the newly-acquired consumer businesses.

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