Wednesday, April 1, 2009

Tata Chemicals - Value Pick

Tata Chemicals
Acquisitions of soda ash makers (UK-based Brunner Mond in FY06 for Rs 800 crore and US-based General Chemical Industrial Products in March 2008 for $1.05 billion) have placed Tata Chemicals in the big league. It has not only emerged as the world's second largest producer of soda ash (capacity of 5.5 million tonne), but it now has an enhanced presence in US, UK and Africa. Soda Ash forms a large part of the chemicals division (sodium bi-carbonate and edible salt are the other major contributors), while crop nutrition (urea, DAP; mainly domestic focus) accounts for the rest.

Notably, while the chemicals business accounts for 40 per cent of consolidated revenues, it enjoys higher Ebidta margins (about 20 per cent) giving it a 55 per cent share in profit. With the overall economic environment having turned weak - prime users of soda ash are glass, soap, detergent, paper and textile industries - realisations and volumes have been under pressure. However, analysts expect Ebdita margins to remain stable in FY10 helped by a sharp decline in input prices (coal and coke; locally) and better realisations in the US (new long-term contracts at higher prices). Notably, majority of Tata Chemicals' production is of low-cost 'natural' soda ash (balance is produced through 'synthetic' route) and is supported by reserves in the US and Kenya. In the edible salt business, the company has been gaining ground and is expected to sustain profitability and growth.The crop nutrition business was impacted by lower realisation of DAP even as input prices were higher, which is also reflecting in its Q3 FY09 performance.

A shutdown at its Uttar Pradesh-based fertiliser plant to stabilise operations of the expanded capacity (up by 33 per cent to 1.16 million tonnes per annum) also impacted operations. Going ahead, lower input costs and higher capacity (and benefits of new urea policy) in the fertiliser business will mean better margins. Also, as the gas supply from Reliance Industries KG-basin is made available, margins should perk up in FY10.

With expansions scaled down, the cost will come down by 28 per cent to Rs 400 crore, which can be funded through annual cash generation of over Rs 1,000 crore. This should also help lower debt further. Operationally, although revenues are expected to decline in FY10 (due to lower realisation), expansion in margins and lower debt should help sustain net profit at FY09 levels; in FY11, it should rise. Expect the stock to deliver good returns.

source : business-standard