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Tata Chemicals (TTCH IN) Rating: 1
3Q FY11 results: target price lowered slightly after disappointing results, but retain Buy
What has changed?
• Tata Chemicals’ (TCL) 3Q FY11 results disappointed (reported PAT of Rs1.6bn,
lower than the Bloomberg-consensus forecast), as its operations in the UK and at
IMACID in Morocco were affected by inclement weather and shutdowns.
Impact
• The shutdown at IMACID had a double impact: a) lower profits from IMACID,
and b) lower production of phosphatic fertilizers at Haldia. BMGL’s (UK
subsidiary) production was down 13% YoY due to inclement weather. Thus,
EBIT from operations (pre-exceptional) declined by 20% YoY.
• Soda-ash demand and pricing firming up: Demand for soda ash remained
strong as a result of an improving global economy. Utilisation rates at the
company’s plants globally continued to increase. TCL has raised prices by 5-
7% across various soda-ash markets recently. Although cost pressure remains at
the India and UK facilities, those in the US and Kenya (together accounting for
about 50% of capacity) could see higher margins in FY12. We believe the
company will benefit from rising utilisation rates and price increases.
• Phosphatic-fertiliser margin could come under pressure, due to: a) lower
subsidy rates in FY12, and b) rising raw-material costs. Management feels that
either the government will have to raise subsidy rates or the manufacturers
would have to negotiate lower raw-material prices so that the business remains
viable. Due to this uncertain outlook, we have revised down our FY12 and
FY13 phosphatic-fertiliser EBITDA forecasts both by 50%, and our FY11,
FY12, and FY13 EPS forecasts by 6.7%, 7.8%, and 8.3%, respectively.
Valuation
• We have lowered our SOTP-based six-month target price by 5% to Rs458 from
Rs482 following our earnings-forecast revisions. We value the soda-ash,
fertiliser and Rallis businesses at 6x, 7x and 7.5x FY12E EBITDA and add the
value of investments.
Catalysts and action
• While the 3Q FY11 results were lower than the market expected, the theme of
improvements in soda-ash demand/pricing/earnings remains intact, and we see
the stock as attractive at current levels. We retain our 1 (Buy) rating, and see
phosphatic and soda-ash pricing as the key share-price catalysts.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Chemicals (TTCH IN) Rating: 1
3Q FY11 results: target price lowered slightly after disappointing results, but retain Buy
What has changed?
• Tata Chemicals’ (TCL) 3Q FY11 results disappointed (reported PAT of Rs1.6bn,
lower than the Bloomberg-consensus forecast), as its operations in the UK and at
IMACID in Morocco were affected by inclement weather and shutdowns.
Impact
• The shutdown at IMACID had a double impact: a) lower profits from IMACID,
and b) lower production of phosphatic fertilizers at Haldia. BMGL’s (UK
subsidiary) production was down 13% YoY due to inclement weather. Thus,
EBIT from operations (pre-exceptional) declined by 20% YoY.
• Soda-ash demand and pricing firming up: Demand for soda ash remained
strong as a result of an improving global economy. Utilisation rates at the
company’s plants globally continued to increase. TCL has raised prices by 5-
7% across various soda-ash markets recently. Although cost pressure remains at
the India and UK facilities, those in the US and Kenya (together accounting for
about 50% of capacity) could see higher margins in FY12. We believe the
company will benefit from rising utilisation rates and price increases.
• Phosphatic-fertiliser margin could come under pressure, due to: a) lower
subsidy rates in FY12, and b) rising raw-material costs. Management feels that
either the government will have to raise subsidy rates or the manufacturers
would have to negotiate lower raw-material prices so that the business remains
viable. Due to this uncertain outlook, we have revised down our FY12 and
FY13 phosphatic-fertiliser EBITDA forecasts both by 50%, and our FY11,
FY12, and FY13 EPS forecasts by 6.7%, 7.8%, and 8.3%, respectively.
Valuation
• We have lowered our SOTP-based six-month target price by 5% to Rs458 from
Rs482 following our earnings-forecast revisions. We value the soda-ash,
fertiliser and Rallis businesses at 6x, 7x and 7.5x FY12E EBITDA and add the
value of investments.
Catalysts and action
• While the 3Q FY11 results were lower than the market expected, the theme of
improvements in soda-ash demand/pricing/earnings remains intact, and we see
the stock as attractive at current levels. We retain our 1 (Buy) rating, and see
phosphatic and soda-ash pricing as the key share-price catalysts.
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