Tata Chemicals and Rallis, two of the oldest Tata companies, which have weathered financial crisis and the mixed legacy of earlier management, are now restructuring to firmly position themselves in rural India

Every student of chemistry knows that there are two types of change in nature: physical change and chemical change. Physical change is reversible while chemical change is not, and the latter always produces a new product out of disparate constituents. For example, sodium, a highly inflammable and toxic metal, combines with a toxic gas, chlorine, to produce what every human being eats every day — common salt (sodium chloride). However, to speed up chemical change or a chemical reaction, one needs a catalyst and critical conditions of pressure and temperature

Today, two chemical companies of the Tata Group — Tata Chemicals and Rallis India — are in great ferment. The catalyst for change is R Gopalakrishnan, executive director of Tata Sons, and the key new elements in the reaction are Prasad Menon, managing director, Tata Chemicals and Rajeev Dubey, managing director, Rallis India. External pressure and temperature have been provided by the poor financial performance of the two companies recently and the competition from global and domestic players. As a result, in another three years we might see totally new companies emerging from these old war-horses.

But before we get into the change underway, it is worth looking at the fundamentals of these companies. Tata Chemicals is a pioneer in soda ash (washing soda), a basic inorganic chemical primarily used in the detergent and glass industry. Today, it produces close to 8 lakh tonnes of soda ash per year. The old plant at Mithapur (Gujarat), built under the leadership of Darbari Seth several decades ago, has been periodically modernised and expanded. However, the most striking feature of the Mithapur plant is the level of integration in the project. First of all, it is the largest salt works in the country, with 30,000 acres of the best salt pan land, which can produce 2 millions tonnes of solar salt at a very low cost. The word Mithapur itself means 'city of salt'.

The soda ash process requires a lot of fresh water, which is normally sourced from a fresh water lake. A plant of this size would require 30 million gallons of fresh water per day but due to severe scarcity of fresh water in Saurashtra, the Mithapur plant was designed to use zero fresh water, a great achievement in itself. The brine, after salt is extracted from it, is called bitterns, from which valuable liquid bromine is extracted. Other chemical products too follow. Pure salt is converted into brine and is used to make caustic soda, another important industrial chemical, and the Solvay process used to produce soda ash from salt, ammonia and limestone, and carbon dioxide is also modified to produce sodium bicarbonate (baking soda).

Interestingly, pure water from the Make Up Water plant is the main product, while over 300,000 tonnes of vacuum-evaporated pure salt is a byproduct. Similarly, gypsum is produced in the salt pans and is used with the left-over limestone fines from the soda ash plant to produce half a million tonnes of cement in a modern plant. In one more instance of integration, the combined cycle coal-based power plant produces both power and process steam required by the plant, and the fly ash from the boiler is used in pozzolano cement making. This finely-tuned and clever integration has made Mithapur township an oasis in the dry Okha region, and the plant itself is extremely cost effective.

Tata Chemicals saw that the detergent industry was one of the main consumers of its products and went into detergent making. But 'Shudh', its detergent brand, did not take off even though it was the only eco-friendly detergent in India. Surf and Ariel, which are eco-friendly in Europe, are not so in India. But, not being a consumer goods company, Tata Chemicals could not leverage on the quality of its product and recently sold it off to Jyoti Laboratories. The cement plant is highly energy efficient, the marketing of the product is being done by ACC. Lacking a marketing arm for cement, margins are not high, even though manufacturing costs are low due to cheap raw materials. Now the management is looking at an opportunity to sell the cement business too.

The 30-year-old dream of Darbari Seth of entering the fertiliser industry became reality with the setting up of the Hazira-Bijaipur-Jagdishpur natural gas pipeline. Soon, Tata Chemicals started work on a gas-based urea plant of 7.5 lakh tonne capacity at Babrala, Uttar Pradesh. The land acquisition for the project was delayed due to various political reasons and was finally commercialised in 1994. Today it is consistently winning the award for one of the most energy-efficient fertiliser plants in the country. The urea produced in Babrala is being marketed by another Tata Group company — Rallis.

The problems in Tata Chemicals started with competition. First there was global competition due to falling duties and, at times, even dumping. While Tata Chemicals is an efficient manufacturer of soda ash, it was not geared to withstand competition from the US industry, which harnesses natural soda ash from lakes full of it. Domestic competition too cropped up when its largest customer, Nirma, went ahead and set up its own half a million tonne soda ash plant last year.

Tata Chemicals was a pioneer in vacuum evaporated pure salt, but tremendous pressure was brought on it through aggressive marketing by Hindustan Lever under the brand name: 'Annapurna'. Clearly, for HLL, salt was a cheap way to establish an all-embracing food brand, Annapurna. Consequently, there were huge dealer discounts. The delay in putting up a urea plant in Babrala too brought its own woes in terms of interest during construction. At the same time, the current fertiliser policy, based on plant by plant allocation of subsidies, gives no incentives to efficient producers while shielding inefficient ones.

As a result of all these factors, profits have been highly volatile and slipped from Rs 288 crore in 1998-99 to Rs 117 crore in 1999-2000. Consequently, the stock too is trading around Rs 50 down from a high of Rs 200-plus a few years ago. Clearly, the main strength of Tata Chemicals is in manufacturing.

Rallis, on the other hand, is the exact opposite. Its main strength lies in marketing and distribution. Interestingly, Rallis is one of the oldest companies still alive and kicking in India. A Greek entrepreneur, John Eustratio Ralli, founded Ralli Brothers in India in 1851, which was rechristened Rallis India in 1948. From a trading company Rallis transformed itself into an agrochemical company, spreading its activities from manufacturing and formulating to distribution and marketing, primarily under the leadership of Vijay Rai. However, it also diversified into pharma, trading in phosphatic fertilisers, seeds, etc and set up some subsidiaries, including one in Israel. Rallis has pesticide manufacturing plants in several locations: Navi Mumbai, Akola (Maharashtra) Hyderabad, Ankleshwar (Gujarat) but its main strength is its sales force that has made Rallis a premier brand in all the important agrochemical markets. Rallis is also furiously focussing and has gotten rid of its engineering and pharma business. Arguably, Rallis' R&D centre in Bangalore is the best in the Indian agrochemical industry. It is the only toxicology lab in India of international standards.

But Rallis has lost money in its subsidiaries and has a huge debt burden of Rs 500 crore. As a result, Rallis' record on the profitability front has been dismal. Even leading to a shocking Rs 25.6 crore loss last year. Even when the going was good Rallis was not a very profitable company. With a top line that has grown from Rs 1,171 crore in 1996-97 to Rs 1,446 crore in 2000-01, the profits were a meagre Rs 22.80 crore and Rs 45.42 crore respectively. Of course, a lot of top line contribution comes from trading, where the margins are low.

As chairman Dr Freddie Mehta said in his address during the AGM on 10 September 2001: "The reported loss during 1999-2000 is RS 25.6 crore. It actually includes a loss of Rs 33.2 crore, which had to be absorbed in the clean-up operations, and Rs 19.3 crore non-operational income, mainly due to the sale of pharma brands and property in Chennai. The losses came from: a write off of Rs 12.96 crore due to earlier debits, Rs 6.66 crore from bulk drugs, sericulture and garment operations. Provisioning Rs 5 crore for more bad debts and Rs 8.5 crore loss in the JV in Israel."

Though Rallis expanded rapidly under the leadership of Vijay Rai, the recent dismal performance saw some heads roll. The result: exit Rai in not too savoury circumstances, enter young Rajeev Dubey from Tata Metaliks in September 2000.

The scene at Tata Chemicals too was no different. The poor performance of Tata Chemicals also brought in management changes, leading to the rather dramatic exit of Manu Seth in August 2000 and the entry of Prasad Menon, a veteran of the fertiliser industry. Gopalakrishnan, who is vice-chairman of Tata Chemicals and is also on the board of Rallis, was pressed into service at Bombay House to set the house right. Gopalakrishnan immediately saw the synergy in the two companies and, together with Menon and Dubey, started a restructuring operation in earnest. Brainstorming about Tata's strategy in chemicals led to clear goals: the aspiration to become the lowest-cost bulk industrial chemicals and to take a major initiative in rural India with a bouquet of products and services to farmers distributing nutrients, fertilisers, pesticides and agronomical advisory services.

The outcome of this brainstorming and close coordination between Rallis and Tata Chemicals has also led to speculation in the media about a merger of the two. Gopalakrishnan, however, pooh poohs it. The trio is now totally focussed on turning around the two companies and recharging them to unassailable levels in customer focus and manufacturing excellence.

Gopalakrishnan is so confident about the results of the process underway that he says: "Excellence achieved in Tata Steel is a result of things set in motion several years ago. I am confident that what is happening in the chemical companies of Tata Group — Rallis and Tata Chemicals — will lead to similar results in about three years." Skeptics might consider it an overoptimistic statement, considering the dismal performance of the two companies.

Business India spent several weeks visiting both Tata Chemicals and Rallis plants in Babrala, Mithapur, Hyderabad, and the famous pesticide market Pattanam Bazaar, in Guntur (Andhra Pradesh), which is reputed to be the largest in Asia, transacting over Rs 250 crore of business in a small street less than a kilometre in length. We also visited the Rallis R&D centre in Bangalore and spoke to farmers in the Pesticide Efficacy Advisory Centre (PEACE) in Andhra Pradesh and in Tata Kisan Kendras in the villages of Uttar Pradesh. The conclusion was clear: adversity seems to have come as an opportunity to these companies. Rapidly they are being transformed into powerhouses that can lead a major Tata initiative into agro business.

Of course, the exercise started with lopping off some old businesses and assets. For example, Rallis has merged some of its subsidiaries like Ralchem into itself while selling off the pharma business to the Shreya group for Rs 18.14 crore. It has also exited from the dyes and sericulture businesses. Gopalakrishnan also discovered a large piece of valuable real estate in Andheri (Mumbai), which was not being used for anything other than entertaining top management cadres. It has been sold for a sizable sum of Rs 133 crore to Tata Sons. At that spot Tata Sons plan to build a world-class campus for the software geeks of Tata Consultancy Services, thereby also exiting from several pieces of real estate in the more expensive Nariman Point. Using group synergies, the expertise in instrumentation at Tata Honeywell and in IT-enabled manufacturing in TCS, the two companies have been pressed into manufacturing Tata Chemicals.

Old dogs and new tricks
In the second phase of proactive steps, the first major initiative has come in HR. On the one hand, the Mithapur plant had excess manpower, which has been pruned through a generous employee separation scheme. While this was expected, what came as a pleasant surprise to insiders was the hefty hike that employees got in both Tata Chemicals and Rallis. "We were working hard even earlier, but there were rumours of the Tatas withdrawing from Rallis. But this hike came as a great morale booster, which showed that the leadership clearly believes that despite current problems the company has a great future," says KT Vijaykumar, regional sales manager of Rallis in Vijaywada.

It had a similar effect in Tata Chemicals as well. According to Anil Vaidya, COO, at Mithapur works, the most interesting HR fall-out has come from an industrial accident. The fire in the power plant in Mithapur earlier this year destroyed the plant and set back production in soda ash, salt and cement plants, but it also brought in great teamwork. The power plant was rebuilt and brought on line in record time and plant engineers like IL Momin and AG Vaidya take great pride in the same.

The momentum generated in this disaster management and rebuilding has greatly helped in pushing forward 'Action 500', a campaign to reduce the cost of production of soda ash by
Rs 500 per tonne by December 2001. Vaidya already claims to have achieved it and is preparing to launch the next one to reduce the cost by Rs 1,500/tonne. Gopalakrishnan and Menon, however, are cautious on this front and say "let the auditors substantiate the claim and then we will announce it". A healthy dose of realism no doubt. But the goal is very clear: Tata Chemicals should become profitable even in a zero-duty regime despite competition from natural soda ash producers.

On the fertiliser front too, Tata Chemicals is working hard to gain higher efficiencies. The fact that there is price control and a consequent cost-plus regime, or that Tata Chemicals is already one of the most energy efficient plants has not deterred them. However, the most interesting change that is coming over Tata Chemicals is on the marketing front. "Strictly speaking, we did not have a marketing group five years ago, when I joined after a long stint in Rallis," says Kapil Mehan, VP, sales and marketing. Tata Chemicals had preeminent market share in soda ash, close to 60 per cent and customers used to get their quota. With imports and new capacity added by Nirma, there came a rude shock. Since then its market share has fallen to about 40 per cent in soda ash and margins have eroded too. "Now we have a team of 30 people in marketing and there are client service officers for top-10 customers as in an ad agency," adds Mehan. Tata Salt, which had a preeminent position in the table salt segment, has also been facing competition from HLL's Annapurna and smaller manufacturers. Mehan and his team are working on a massive ad campaign to capitalise on the fact that Tata Salt is the only vacuum evaporated pure salt in India. However, to cover the flanks they are also test marketing a cheaper crushed salt under the brand name Samudra.

However, it is on the fertiliser front that Tata Chemicals has taken a major strategic initiative. Under Darbari Seth's leadership, it set up a few modern centres, called Tata Kisan Kendras, in some parts of India, starting with Ujjhani near Babrala (UP). Today they have blossomed into the front end of Tatas' ambitious and far-reaching foray into agro business. Every Tata Kisan Kendra (TKK) has an agronomist who can advise farmers on what cropping pattern to use or diagnose a particular pest attack in their crop and recommend the appropriate agro chemical to be used. These centres also have a godown for fertilisers and a store that sells anything from Tata Salt to pesticides. Several training sessions are held here for the surrounding farmers, who enroll themselves in the TKK club. There is a waiting list to become a TKK member and a handful of people are chosen from each village. The centres have all modern amenities, including conference rooms and cafeterias and look futuristic in the impoverished UP milieu. For the sake of completeness, another service that is being offered is modern farm machinery on hire at affordable rates.

When Business India visited the TKK in Ujjhani there was a day-long training session going on, covering veterinary science to cropping patterns and agronomical information on new seeds and agrochemicals, in which 100 farmers were participating. The participants had come on their own expense and consisted of farmers between 20 and 60 years of age. The community development team at Tata Chemicals, consisting of architect couple Vivek and Alka Talwar, has plans to propel these villagers into the 21st century. They are working on a major Geographic Information System project that will contain the most detailed rural database ever collected. You just point and click on any piece of land in any surrounding village in the computer kiosk at a TKK and you can get details of cropping pattern, satellite-based information regarding soil fertility contours, crop yield estimation and even pest attacks. A farmer can just drop in at a TKK and get all the information he needs — including the much-coveted land records.

Doesn't all this sound like expensive social work when the company is not doing too well? "Not at all. In fact, the godown within a TKK sells about 3,000 tonnes of fertilisers and makes the whole centre self-supporting," says BB Singh, who looks after fertiliser marketing.

It is this front end with farmers that Rallis excels in. "The Tata brand equity in rural India is a revelation," says Rajeev Dubey, but he is understating Rallis' own network in bringing this about. But since there are so many pesticide companies and any new product gets copied very fast, how do you maintain growth? There are two ways of doing it. One is to constantly pump your R&D to come with better molecules and formulations.
Dr MS Mithyantha and his team at Rallis R&D centre at Bangalore are lining up such a pipeline. A factor which reduces the time from lab to market for such products is this lab itself. It being arguably the best toxicology lab in India, they can study the effect of any pesticide molecule on birds, bees, animals and so on, and file the required data for regulatory approval. Even though this procedure is not as elaborate as that for new drugs, it is still quite expensive and time consuming. Even MNCs who have discovered the molecules and are using them elsewhere have to again file this data in India before introducing these molecules.

Since they have a rather elaborate set up, Rallis is offering this service to other companies and making money on technical services. Quietly, Mithyantha's chemists and entomologists
have also come up with novel molecules which they are in the process of patenting. If one of these turn out to be an effective pesticide molecule, then that will be the first agrochemical to be discovered in India.

There is a sea change on the marketing front in Rallis as well. "We have gotten rid of high-volume, low-margin pesticides but the primary change that has come about in the last year is that the top management is on top of the market situation and there is no dumping of inventory on us. Today we produce what we need and thus we are able to get rid of the discount wars and realise better prices and also lower inventory in our distribution network," says B Raj Kumar, regional sales manager of Hyderabad.

The other way to maintain farmers' mindshare is to have an extensive network of agronomists who act like crop doctors. There is one major difference between pharma marketing and agrochemical marketing. Pharma companies need only to educate the doctors about new drugs and make sure that the pharmacies carry them. After all, the consumers — patients — have intrinsic belief in what the good doctor prescribes. In the case of agrochemicals, there is no such structure. As a result, farmers depend on word of mouth and half-baked information and tend to overuse pesticides, or the wrong ones and at the wrong time. They need farm doctors who can test soil chemistry and advise on what fertiliser to use when and in what quantity. And when there is a pest attack it should be diagnosed correctly and correct advice should be given on what agrochemical to use. "Incorrect practices not only lead to extra chemical load on the crops and hence on the consumers, but also at times serious resistance developing in the pests. Rallis is doing it with an army of paraagronomists. For example, in Vijaywada alone we had deployed over 1,000 youth, armed with in-house training and a moped, to stay with farmers during the busy season and deliver service," says KT Vijay Kumar.

The result of this kind of interface is an amazing amount of bonding. Business India was witness to an impromptu farmers' meeting in a village near Aligarh (UP), where Dubey was questioned by about 30 farmers on supplies of particular fertilisers and agrochemicals. The sense of bonding was so strong that these farmers were least intimidated by the presence of the managing director of the company himself. Moreover, they seemed to be surprisingly well-versed in phytochemistry.

Obviously, a quiet revolution is waiting to happen in the countryside and companies like Rallis and Tata Chemicals are playing their part in hastening it. There is immense hunger among the farmers for agronomical services, along with proper products. Rallis is also exploring seriously the seed market and Dr. A K Deshmukh and his team at Pattancheru, near Hyderabad, are busy developing new hybrids and high-yielding varieties.

Rallis is also cautiously venturing into corporate agriculture by trying to reduce the role of intermediaries. "It is clear that there is a multi-billion dollar opportunity in food processing and agro business, but the experience of the corporate sector in this field is very mixed. There is Pepsi's experience in Punjab, there is Hindustan Levers' experience with wheat growers and atta. There is also an unrelated but relevant experience of a lot of business houses with aqua culture. That is why on a small scale we are doing some things in Chitradurga in Karnataka and a different experiment in Madhya Pradesh and Haryana," says Dubey.

Tatas, ICICI and HLL have launched a 'Partnership Project' for contract farming in wheat and basmati rice in Haryana and Madhya Pradesh to provide a profitable model for agriculture. Rallis and ICICI have also tied up with big retail chains like Food World and Nilgiris and juice maker Sunsip for contract farming of fruits and vegetables in Karnataka.

Thus two of the oldest companies in the Tata stable have weathered a financial crisis and the mixed legacy of earlier management and are restructuring themselves. There are turnaround strategies ad nauseum in corporate India, but what distinguishes the current change underway in Tata Chemicals and Rallis is the aggressive vision of the group to position itself firmly in the hinterland of industrial India. In the process they are acting as agents of social change even in the most backward villages, where the state has withered away.