Stock Views on Tata Chemicals, HPCL, GODREJ Consumer Products

GOLDMAN SACHS on TATA CHEMICALS

GOLDMAN Sachs downgrades Tata Chemicals to ‘neutral’ from ‘buy’ with a 12-month P/BV-based target price of Rs 140, implying downside potential of 12% from here. With a weakening global economy and consequent correction in agri commodity prices, Goldman Sachs now expects downside risk to Tata Chemicals earnings from its soda ash and fertiliser businesses. It forecasts soda ash prices to decline by 20-25% globally in FY10E, primarily due to:

(1) soda ash producers not having the necessary pricing power to retain the benefit of low energy prices;

(2) softening demand due to a slowdown in the global economy; and

(3) a surge in Chinese soda ash capacity of about 4 million tonnes over the next two years, which may have a material impact on Asia’s soda ash margins.

The 12-month target price of Rs 140 is based on a trough P/BV multiple of 0.8x. Key risks to the target price include:

(1) renewal of soda ash prices at prices higher than estimates;

(2) further depreciation of the rupee against the dollar; and

(3) a rebound in international urea prices.

MERRILL LYNCH on GODREJ CONSUMER PRODUCTS

GODREJ Consumer Products’ (GCPL) margins are expected to be the best ever in FY10E, driven by a sharp fall in palm oil prices and product price increases effective September ’08. Recent excise duty cuts should further reduce input costs. The management’s focus is on driving category sales growth, rather than market share gains. The latter may not be easy to achieve, given that GCPL is the market leader. The share of international sales may go up from the current 25% in the long term. No impact of the economic slowdown has been witnessed on the FMCG sector so far, and sales growth has picked up in the past two months. Merrill Lynch believes GCPL can benefit from a tightening consumer wallet as its product portfolio is skewed towards economy brands. At 13x FY10E P/E, GCPL is trading at a discount to its FMCG peer group and the historic average. Merrill Lynch expects the discount to narrow as earnings momentum picks up.

HSBC on HPCL

HSBC has cut the target price on HPCL to Rs 271 and downgraded its ratings to ‘neutral’ from ‘overweight’. HPCL incurred a loss of Rs 4,100 crore in H1 FY09, and the recent fuel price cut has limited its ability to recoup a portion of this loss. With the possibility of a second fiscal stimulus package, there is also the risk of further price cuts. While the government has initiated discussions for reforms in auto fuel pricing, HSBC remains cautious on its implementation as this can result in higher diesel prices. Based on oil price assumption of $90/bbl for FY09 and $71/bbl for FY10, HSBC estimates sector under-recoveries of Rs 138,000 crore and Rs 55,000 crore, respectively, and 50% compensation in the form of oil bonds and 33% in the form of discounts from upstream players. Based on a combination of P/E and P/BV approaches, HSBC has cut its target price after accounting for the recent derating of the market and HPCL’s refining peers. Any reform in the subsidy mechanism allowing HPCL to bear lower levels of under-recoveries will be a key catalyst for the stock.