Tata Chemicals

Tata Chem: Good yields

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.