Stock Review: Tata Chemicals (TCL)

 

Over the past three years, soda ash major Tata Chemicals has aggressively used the inorganic route to strengthen its key business segments. Its latest purchase of a partial stake in a urea plant in West Central Africa is another step towards increasing its footprint in the global fertiliser market.

Tata Chemicals (TCL) will invest $290 million (over . 1,300 crore) to acquire 25.1% stake in the urea manufacturing project in the Republic of Gabon. The remaining stake is held by Singapore-based Olam International and the Republic of Gabon.

The first phase of the proposed plant with 1.3 million tonnes per annum capacity will commence in three years; the capacity could be doubled in the next phase. Considering a total capacity of 2.6 million tonnes, TCL has valued the plant at over . 1,981 crore per million tonnes. With the existing capacity of 1.2 million tonnes per annum, TCL earns 18% of the total revenue from urea. Its current enterprise value is around . 11,977 crore. A rough calculation suggests that TCL commands a valuation of over . 1,743 crore per million tonnes of urea capacity.
This means TCL has paid nearly 14% more to acquire the overseas urea capacity. The premium can be justified given the benefits of the deal. The port-based ammonia-urea fertiliser manufacturing complex offers the necessary gas feedstock, which is tied up at a 25-year fixed price natural gas contract with the local government of Gabon.

The plant, located near Gabon's main seaport, will ensure cost effective transport to the target markets, including Africa, North America, Latin America and India. Olam's strong network and logistics expertise will help TCL to expand its international market presence.

According to the pact, TCL would sell 25% of the total produce in India subject to deregulation of urea imports in the country. The deal is likely to increase the company's share in the total urea output by private companies in India to 15% from 12%. The latest deal is the fifth overseas transaction for TCL in three years. The investment in Gabon is likely to help TCL gain a formidable ground in the fertiliser segment.