Stock Review: Tata Chemicals

 

 

The new gas pricing and utilisation policy and higher global demand for soda ash augur well for Tata Chemicals

 

AGOOD monsoon has led to a spurt in fertiliser stocks. Given the anticipated increase in the allocation of natural gas from the government, they are expected to perform well in the coming quarters.

BUSINESS:

Tata group firm, Tata Chemicals (TCL) was incorporated in 1939. It is ranked as one of the leading players in the agribusiness sector with a strong presence in crop nutrients and crop protection products. The company operates in industrial chemicals, crop nutrition and consumer products and serves a wide customer base spread across five continents. TCL has manufacturing facilities across four continents including North America, Europe, Africa and Asia.

   TCL is the world's second-largest producer of soda ash with a total capacity of 5 million metric tonne per annum of which more than 60% is attributed to natural soda ash. It is a market leader in the Indian branded iodised salt segment under the brand Tata Salt. In the private sector, TCL is one of the country's leading producers of nitrogeneous and phosphatic fertilisers and offers a wide range of crop nutrition products under Tata Paras brand.

   Under the Tata Swach brand, TCL offers the world's lowest cost house-hold water purifier.

   Tata Chemicals has adopted a strategy of global acquisitions to expand its product and customer base. In 2008, it bought US-based General Chemical Industries Products (GCIP) which increased the company's global soda ash capacity to 5.5 mt per annum. This was followed by the buyout of UK-based Brunner Mond Group in early 2006. Recently, TCL increased its stake in another group firm Rallis India by nearly four percentage points to 50.6% by buying shares of worth 89.03 crore on preferential basis. The deal is expected to benefit TCL in future.

GROWTH DRIVERS:

Going ahead, the company is expected to benefit from the improving soda ash demand across the globe. The pricing mechanism looks to be stable in most of the markets but Europe which continues to put pressure on the company's performance.

   The company's water purifier business under the name 'Tata Swach' recorded strong sales during the quarter. The company aims to sell a million units in the current financial year. Further, the company plans to roll out the business nationwide and eventually enter into the next line of product offerings through various technology enhancements. The company has lined up a capex of around 500 crore for the next 2-3 years. It intends to commission a customised fertiliser plant at Babrala, at a capacity of 1.32 lakh tonne per annum, by this month end. It plans to further increase the number of such units to 10 in the next three years. Given the new pricing and gas utilisation policy, the company is expected to increase the urea capacity of the Babrala plant two-fold at a capex of 4,000 crore. This would depend on the allocation of natural gas from the government.

FINANCIALS:

The company posted strong results for the quarter ended June 2010. This was mainly on account of one-time changes. During the quarter, the company's topline grew 5.6% to 2,477 crore against the corresponding period last year. This was on the back of a demand improvement witnessed in the domestic as well as the inter-national soda ash market. The inorganic chemicals segment which attributes to 51% of the company's net sales posted a nearly 6% fall in its revenue to 1,299 crore for the same period due to the pricing pressure in some of the markets. While the revenue from the fertilisers segment remained more or less stagnant during the quarter, the agriinput segment registered a huge increase in its revenue to 238 crore from 27 crore in the June 2009 quarter. This was mainly due to Rallis India becoming a part of the company.

   The company's bottomline rose more than five-fold to 216 crore against the year-ago period. This can be attributed to two reasons. In November 2009, Tata Chemicals increased its stake in Rallis India to over 50%, the numbers of which were included in the June 2009 quarter. Also, in the June 2009 quarter, company had incurred one-time expense of 87 crore against the restructuring costs of its Netherlands unit of Brunner Mond. Despite higher traded good costs, lower input prices led to a spurt of 610 bps in its operating profit to 20.2%. Also, a proportionate decrease in the other expenses as a percentage of the net sales contributed to the same.

VALUATION:

At the current market price of 418.7, the scrip is trading at 22.1 times its earnings for the yearended June 2010. Given the encouraging demand environment in the domestic and international soda ash market and newer capacities coming in place, the stock looks attractive in the coming quarters.

CONCERN:

The slowdown in the demand and weak pricing mechanism witnessed in the geographies of Europe continue to be a concern for the company stressing the performance of the Brunner Mond plant.