Stock Review: TATA CHEMICALS

Tata Chemicals posted a subdued performance for the December 2010 quarter on a consolidated basis. Although the domestic business flourished during the quarter, lower sale volumes recorded by the subsidiaries on account of adverse climatic conditions, unplanned plant shutdown and high input costs pulled down the overall growth.

The company's December 2010 quarter consolidated sales rose 9% to . 2,860 crore, thanks to a 18% growth in the fertiliser segment to 1,200 crore recorded. The operating profit margin fell by 490 basis points to 15.4% due to higher raw material prices.

 

Compared with the year-ago period, input costs in relation to net sales were higher by 690 bps to 43.7%. This resulted in December 2010 being the second consecutive year of net profit falling on a year-on-year basis. In the past few quarters, the company has witnessed high volatility in profits, which have been alternately recording a rise and fall on a year-on-year basis. The main reason is that the company's domestic and overseas businesses have hardly grown in sync. When domestic business performs well, the overseas doesn't and vice versa. The quarters when both these businesses did well — June 2010 and December 2009 — the company posted healthy profits of around 250 crore.

This was the case with its December 2010 quarter numbers, when domestic business registered a healthy 30% profit growth, but overseas profits nearly halved.

The company's US-based subsidiary General Chemicals is seeing strong soda ash demand locally as well as in export markets. TCL intends to raise the soda ash capacity at its GCIP plant by 4-lakh tonne in the coming quarters. Moreover, it has lined up various other capacity expansion plans for the next two years, including salt and fertiliser plants.
The recent 20% subsidy reduction announced by the government on DAP and complex fertilisers from April 2011 makes the company's outlook on the complex fertilisers cautious. Moreover, rising demand for phosphoric acid is putting upward pressure on its costs. In view of the challenges ahead, the scrip's valuation has come down to just 10 times its earnings for the trailing 12-month period.