Stock Review: TATA CHEMICALS

LEADING soda ash manufacturer Tata Chemicals reported disappointing numbers for the September 2010 quarter as its profits plunged despite a robust topline growth. Higher raw material costs and unplanned plant shutdowns proved to be the main causes for the decline.

Following the announcement of the results on Friday, the stock of the company crashed nearly 9.5% to its monthly low before closing 8.5% lower at . 390.2. The scrip appears to have stabilised at that level in the last couple of days.
During the September 2010 quarter, the company's net revenue grew 33% to . 2,991 crore, while the net profit dropped 43%to. 127 crore. A fall in profit was not unexpected, considering the fact that in the year-ago period it had booked an extraordinary gain of . 87 crore on the sale of its Netherlands unit of Brunner Mond.

However, it was the 290 bps drop in the company's operating profit margin to 10.3% that surprised the market. This drop was mainly due to high raw material price, which as a percentage of net sales surged by nearly eight percentage points to 45%.

Also, unanticipated plant shutdowns — floods and change of calciner at Meethapur plant and a fire at General Chemicals plant in the US — impacted production volumes, pushing the margins further down.

During the quarter, the company commissioned its first customised fertiliser plant at Babrala with a capacity of 132,000 TPA. The company plans to set up nine more similar plants across the country over the next three years.
Going ahead, the company is likely to benefit from the recovering demand for soda ash, which has improved the pricing environment globally except in Europe. At the same time, the domestic fertiliser business is benefitting from the new government policies.

The company intends to arrest the fall in margin by improving internal efficiencies, while taking efforts to pass on the cost hikes to consumers. One needs to wait for the company's future results to see to what extent these strategies revive its operating margins. At the current price-to-earnings multiple of 14.4 the company appears fairly valued.