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
The global de-rating of commodity stocks and worries about weakening demand and prices for soda ash have contributed to a sharp fall in the Tata Chemicals stock to Rs 104 levels. However, at its trailing P-E of four times, the stock’s valuation appears to factor in most of the risks to earnings, while ignoring the investment positives.
Though Tata Chemicals’ global soda ash business does face the prospect of both a volume and a price decline from the levels managed in the first nine months, this is likely to be offset partly by higher sales (driven by volumes) in the fertiliser business and continued gains in the salt business.
The company’s soda ash operations are much less vulnerable to global recession than other commodities as they cater mainly to user industries such as detergents and container glass, which face little demand destruction even in a slowdown.
Flat glass, which accounts for about 20 per cent of the global soda ash offtake, is the only user sector facing the prospect of lower offtake now. This segment too may receive a boost if the Chinese stimulus plan really does pep up construction and infrastructure activity in the Asian region.
On the pricing front, Tata Chemicals’ diversified geographic presence has helped; with soda ash contracts in the US and Europe already locked in at higher prices, though contracts in Asia face price erosion.
Even if the soda ash business does see shrinkage in earnings over the new few quarters, the fertiliser business (60 per cent of revenues) appears set to ramp up its earnings performance. The completion (on March 3) of the de-bottlenecking project at Babrala increases the company’s urea capacities from 8.64 lakh to 11.55 lakh tonnes per annum and will bring in realisations linked to import parity prices. Improved gas availability from the Reliance project is also set to improve the margin profile of the urea business.
While phosphatic fertilisers may make a lower revenue contribution on the back of lower output or realisations, input cost pressures in this segment have eased significantly.
Though it too has sewn up several global acquisitions, Tata Chemicals is better placed than its peers in the group in terms of net debt:equity (now at 1:1), borrowing costs (averaging just 6.2 per cent of the outstanding debt) and operating cash flows (both the fertilizer and salt businesses are cash cows).
With the urea expansion already completed and other capex deferred, future cash flows can be deployed to draw down debt on the balance-sheet. The attractive dividend yield of 8.6 per cent on the stock (last year’s dividend was at Rs.9 per share, with a low payout ratio) at current market prices, also curtails downside risks.
AARATI KRISHNAN
businessline 15-03-09
Investment Strategy Now :
Our View :
The prices have run up in the last week too fast and with this speed it can touch Rs.150. One should not invest at this high price but should start buying around 115 levels for a decent gain over a 12 months period.