Tata Chemicals: Plant shutdowns;cost pressures take their toll: Alchemy

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Plant shutdowns and cost pressures take their
toll
Higher trading of fertilisers drives top line
 During 2QFY11, higher trading of fertilisers (`5.6bn compared to `3bn in 2QFY10)
and consolidation of Rallis led to 31.6% YoY increase in revenues to `29.3bn.
 Soda ash sales volumes increased 2.7% YoY to 1.1mn tonnes. While Indian
(Mithapur) soda ash sales volumes suffered on account of floods (down 8% YoY),
GCIP soda ash volumes (up 5.6% YoY) and BMGL volumes (up 3.4% YoY) led to
the overall growth.
 Urea production also suffered during the quarter due to shutdown at Babrala due to
problems in ammonia reactor.




Higher raw material prices led to margin pressure
 EBIDTA margins suffered due to steep increase in raw material costs (coke and coal
prices), which the company could not pass on to the final consumers to the full
extent. Though the company took partial price hikes during the quarter (`500/tonne
in India and US$10-20./tonne in global markets), rise in prices was not sufficient to
compensate rise in costs. EBIDTA for the quarter declined 7.4% YoY to `3.6bn.
 While companies’ US (GCIP) operations continued to do well, European (BMGL)
operation suffered due to cost pressures. Nevertheless, BMGL recovered on QoQ
basis and posted EBIT of `250mn.IMACID benefitted from strong phosphoric acid
prices, and posted EBIT of `90mn.
 Major disappoint came from domestic operations, where soda ash margins were
under pressure. Fertiliser division also suffered due to shutdown at Babrala, which
led to energy inefficiencies resulting in lower margins.
 The company is increasing its DAP fertiliser capacity by 300,000 tonnes, which will
come on stream in next 3 years. As far as urea capacity expansion is concerned, the
company will take a call on whether to go ahead with expansion in November 2010.

Valuation
In view of lower than expected results in 2QFY11, and management guidance of margin
pressures going forward, we have downgraded FY11and FY12 EPS estimate by 12% and
11%. The stock is trading at 11.5x FY12E P/E, which is at upper end of its historical
trading range. We continue to like the company due to its positioning as one of the
lowest cost producers of soda ash, and assured cash flows from consumer products and
fertilizer business. The stock has already achieved our target price. In view of near term
headwinds in the form on margin pressure on soda ash business, we recommend
Market Perform on the stock.