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Tata Chemicals Ltd. Earning cuts ahead; retain Underperform
Disappointing quarter; expect earnings downgrades
Tata Chemicals reported a disappointing quarter, with a 25% yoy decline in recurring
PAT. While revenue was up 33% yoy, it was led by a jump in trading of fertilizers and
as Rallis was consolidated. Post a disappointing quarter, we expect earning
downgrades ahead. While we tweak estimates marginally, we remain ~14% below
consensus. We reiterate our Underperform rating with an unchanged PO of INR245.
Fertilizers impacted by low utilization, cost pressures
While Q2 is expected to be seasonally strong for fertilizer companies, TTCH’s
urea production was down 30% due to a snag in the urea plant. We believe loss
of production in urea will limit the benefits to be derived from debottlenecking, as
the cutoff quantity for import-linked pricing is 0.957mn ton. This will impact Q4
margins. Trading in fertilizers likely jumped ~80%yoy due to strong monsoonrelated
demand. Company also indicated costs pressures in non-urea fertilizers.
Soda ash continues to remain drag
Domestic soda ash posted a weak quarter due to rising raw material prices and
flooding of plant in rainy season. Profits in soda ash subsidiaries GCIP and BMGL
declined 22%yoy, likely as TTCH targeted market share gain in response to
competition from Chinese producers. We expect soda ash to remain a drag going
ahead, given global over-capacity, and price increases, if any, will likely be driven
by rising transportation costs.
Reiterate Underperform on unfavorable risk reward
The stock trades at a 12x FY12e PE for ~14% EPS CAGR. New businesses, like
marketing pulses, bananas and water purifiers, while making a positive
contribution, will have a limited impact on earnings. Given low return ratios and a
pressured margin outlook, the risk/reward remains unfavorable. We reiterate our
Underperform rating.
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