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Tata Chemicals |
Downgrade earnings on weak results |
ACCUMULATE
CMP: Rs 345 Target Price: Rs 393
n TCL reported weak results with 34% yoy decline in APAT to Rs 1.5 bn driven by 570 bps drop in EBITDA margin, however the same was in line with our estimates
n Weak results of subsidiary BMGL due to adverse climatic conditions in Europe and of IMACID due to plant shut down affected Q3FY11 results
n Price increase of 7-12% taken in soda ash in various regions should help in margin expansion in the near future, however management outlook on fertiliser business remains cautious
n Downgrade FY11E / FY12E estimates by 17% / 7% to Rs 28.7 / Rs 33.2 on account of margin pressure in its soda ash business, however maintain ACCUMULATE rating
Q3FY11 APAT down by 34% yoy to Rs 1.5 bn, in line with estimates
TCL’s consolidated revenues of Rs 28.9 bn, +9.1% yoy, were ahead of estimates
(Rs 26.6 bn) on account of higher than estimated fertiliser revenues. However EBITDA
margins at 15.3% (-570 yoy / +130 bps qoq) were below estimates of 16.9%. APAT
(adjusted for Rs 167 mn gain on sale of investments and Rs 62 mn worth of forex gain)
dropped by 34% yoy to Rs 1.5 bn which was in line with estimates of Rs 1.5 bn.
BMGL and IMACID drag results
Production loss due to adverse climatic conditions in Europe affected BMGL’s results.
Revenues for BMGL declined by 20% yoy to Rs 3.9 bn and due to drop in margins
(driven by lower operating leverage and rising input cost like crude and coking coal) the
subsidiary accounted for loss of Rs 100 mn. TCL’s other subsidiary - IMACID also
reported poor results with revenues of Rs 700 mn and nil PAT as against Rs 450 mn in
the previous year (which included one time inventory gain of Rs 300 mn). IMACID’s
performance suffered on account of plant shut down for 35 days which the company
undertook during the quarter. IMACID’s plant has resumed operations by Dec’10.
Performance of domestic operations and GCIP - remains satisfactory
Despite witnessing several cost pressures like higher coal and coke price by 20-25%,
TCL’s domestic soda ash business, witnessed satisfactory performance. Stand alone
APAT at Rs 1.17 bn declined marginally by 7% yoy. Subsidiary – GCIP’s results with
PAT of Rs 490 mn, +17% yoy also remained satisfactory on account of strong soda ash
demand in US as well as in export markets.
Downgrade FY11E / FY12E estimates, Maintain ACCUMULATE
We believe that, although margin pressure is likely to continue in the near future due to
rising input costs, TCL’s results should improve marginally in Q4FY11 driven by 1)
Recent price increase undertaken by the company in soda ash across the markets and
2) Higher fertiliser profits from urea. Keeping the current margin pressure in view, we
are downgrading our FY11E / FY12E estimates by 17% / 7% to Rs 28.7 / Rs 33.2.
However we maintain ACCUMULATE rating on the stock due to sharp correction in the
stock price with a price target of Rs 393.
Standalone performance remains satisfactory
On standalone basis, TCL’s revenues increased by 15% yoy to Rs 17.8 bn and were ahead
of our estimates mainly on account of higher fertiliser revenues. Fertiliser revenues
increased by 13.5% yoy to Rs 12 bn while chemical segment revenues increased by 8.6%
over previous year to Rs 5.3 bn.
Chemical segment margins - though lower yoy - improved sequentially
Although, margins in the chemical segment declined by 380 bps yoy to 20.1%, they
witnessed an improvement of 780 bps over Q2FY11 mainly due to higher production since
Q2FY11 production was affected due to floods in the region. Resulting EBIT from chemicals
- declined by 8% yoy to Rs 1.1 bn. Fertiliser segment margins also improved over the
previous quarter as they increased by 400 bps qoq to 8.9% (-340 bps yoy). Consequently,
EBIT from the fertiliser segment increased by 80% qoq to Rs 1.07 bn.
With lower EBIT margins in both the segments, on a y-o-y basis, overall EBITDA margins
for the standalone business faced a contraction of 400bps to 13.3% resulting in 11% yoy
decline in EBITDA to Rs 2.4 bn. On stand alone basis, company reported APAT of Rs 1.2
bn (-7% yoy / +140 %qoq). APAT for the quarter is adjusted for Rs 230 mn EO gain on
account of sale of investments and forex income. RPAT for the quarter increased by 29%
yoy / 162% qoq to Rs 1.3 bn.
Complex fertiliser sales declined due to raw material constraint
On account of lower raw material availability of phos acid due to plant shut down at
IMACID, complex fertiliser sales volumes declined by 33% yoy to 134 thousand mt. Urea
sales volumes also declined marginally by 4% yoy to 332 thousand mt. Market for edible
salt remained strong with salt volumes growing by 10% yoy to 203 thousand mt. Soda ash
volumes remained flat at 171 thousand mt.
Subsidiaries performance
GCIP – Encouraging performance, ahead of estimates
GCIP again posted satisfactory performance with sales volume growth of 4% yoy to 597
thousand mt. Revenues declined by 3.7% yoy to Rs 4.4 bn while EBIT declined marginally
by 6% yoy to Rs 1.05 bn. PAT after minority interest at Rs 490 mn was inline with our
estimates – with increase of 17% yoy to Rs 490 mn.
Increase in soda ash prices by ~7% for CY11
Demand outlook for US soda ash market remains encouraging on account of buoyancy in
demand from the domestic US market and growing demand from exports. Contract prices
for soda ash effective for CY11 have materialized at US$ 12-14 / mt - higher by ~7% - likely
to lead to margin expansion in the near future.
IMACID – Plant shut down affected production
In Q3FY11, IMACID suffered production loss for approximately 35 days - on account of
unplanned plant shut down, as a result of which, revenues declined by 19% yoy / 48% qoq
to Rs 700 mn. The company reported EBIT loss of Rs 20 mn as against profit of Rs 450 mn
in the previous year and Rs 90 mn in the previous quarter (Q2FY11). It is to highlight that
previous year EBIT of Rs 450 mn also included one time gain of ~ Rs 300 mn on account of
inventory gain on rock phosphate. Contribution of IMACID, in the consolidated results -
remained nil in Q3FY11.
IMACID’s plant – which faced an unplanned shut down - has resumed operations during
Dec’10 and we expect profitability to return to normal in Q4FY11. Phos acid contracts for
Q4FY11 have been confirmed at US$ 830 / mt which are ~US$ 50 / mt higher than contract
prices for Q3FY11.
BMGL – Adverse climatic conditions affected production
BMGL’s Q3FY11 results disappointed with loss of Rs 100 mn as against profit of Rs 230 mn
in the previous year and profit of Rs 70 mn in the previous quarter (Q2FY11).
Revenues declined by 20% yoy to Rs 3.9 bn on account of lower sale volumes (down by
10% to 348 thousand mt). Sale volumes declined due to adverse climatic conditions in
Europe which affected transportation and production at the plant. BMGL’s operations were
also affected due to rising crude and coke prices which have gone up by ~20%.
Margin pressure to continue despite price increase - Higher capacity
utilization may drive net margins
During Q3FY11, although the company has taken price increase of ~10% in Kenya and
~8% in the UK market for soda ash, we expect margin pressure is likely to continue in the
near future - due to higher input cost (mainly crude oil). However improved demand outlook
for soda ash and higher capacity utilization at its Kenya (Magadi plant) should drive
operating leverage.
Rallis contribution at Rs 170 mn
Rallis became the subsidiary of TCL effective from Q3FY10. Rallis contributed revenues of
Rs 2.7 bn, EBITDA of Rs 510 mn and PAT after minority interest of Rs 170 mn. We expect
results for Rallis to remain encouraging on account of growth in exports market and strong
demand from domestic agrochemicals market.
Conference call highlights
Management’s outlook on complex fertiliser business remains cautious
TCL’s management shared cautious outlook on its complex fertiliser business for the near
future, due to recent reduction in subsidies announced by the government on DAP and
complex fertilisers by ~20% (Rs 3000 / mt), effective from April 2011. Global phos acid
prices have started firming up and increased by US$ 50 / mt to US$ 830 / mt (from earlier
contracted price of US$ 780 / mt) for Q4FY11. On one side domestic complex fertiliser
players are under pressure to negotiate for lower raw material prices to absorb subsidy
reduction, while on the other hand rising global demand for phos acid clubbed with limited
supply is unlikely to bring raw material prices down. To combat this, complex fertiliser
players will be forced to increase end prices to the farmers by ~30%, failing which
companies’ profitability may come under pressure. Management indicated that an
extraordinary scenario may even require the government to review and revise the subsidy
rate upwards. However with current ambiguity prevailing over the situation, TCL’s
management remains cautious on its domestic complex fertiliser business.
Urea production above cut off may result into incremental PBT of Rs 400 mn
in Q4FY11
In 9MFY11, TCL has achieved urea production of 800 thousand mt. It is to highlight that any
production above its cut off level of 960 thousand mt will be entitled to subsidy under IPP
regime (applicable subsidy on additional urea production above cut off will be compensated
at 85% of average IPP). With current run rate, we estimate the company to achieve total
production of 1.06 mn mt resulting in incremental urea production of 100 thousand mt to be
eligible for IPP linked subsidy. We estimate the company to generate additional PBT of Rs
400 mn in Q4FY11 via this additional production.
Soda ash business outlook improved on account of firm global demand
Management’s outlook on domestic as well as global soda ash business remains positive.
With recovery in US and other world markets, demand for soda ash has been encouraging
and the company was able to increase prices in many key markets. Contracted prices for
soda ash have been revised upwards by 7-11% in various markets Q4FY11 onwards.
Although it is to note that input cost which includes coal, coke and crude has also gone up
by 12-20%. As the price increase for finished products has happened at the end of the
quarter, management expects some margin expansion going forward.
Acquisition of British Salt to secure raw material availability
During the quarter, TCL’s subsidiary – BMGL acquired 100% stake in ‘British Salt’ for an EV
of GBP 93 mn (Rs 6.5 bn) to secure raw material supplies for Brunner Mond UK as well as
a new business of branded and industrial salt in UK. British Salt reported revenues of GBP
35 mn and EBITDA of GBP 17 mn in the previous year and the management indicated that
British Salt does not have any debt on its balance sheet.
Except urea expansion, current capex plans are not significant
Tata Chemicals does not have any significant capex plans lined up in the near future except
brownfield urea expansion with estimated cost of Rs 40 bn. Expansion of soda ash capacity
at GCIP by 400 thousand mt is also under consideration. Tata Chemical’s current pipeline
of capex includes -
¾ Approximately Rs 1.8 bn for expansion at its salt facility to increase the capacity by 200
thousand mt. This expansion is expected to come on stream by Mar’2012
¾ Rs 1.4 bn towards two customized fertiliser plants (each project costing Rs 700 mn)-
Expected commissioning for these projects in by Mar’2012
¾ Rs 110 mn for smaller operations at Haldia (complex fertiliser) plant
¾ Rs 700 mn of initial capex for engineering and infrastructure on Biofuels production in
Mozambique
We expect that none of these capex plans (except urea which is atleast a three year long
project) are likely to result in any significant cash out flows and will be met largely through
internal cash generation.
Downgrade FY11E/ FY12E estimates by 17% / 7% respectively
We believe that, although margin pressure is likely to continue in the near future due to
rising input costs, TCL’s results should improve marginally in Q4FY11 driven by 1) Recent
price increase undertaken by the company in soda ash across the markets and 2) Higher
fertiliser profits from urea. Keeping the current margin pressure in view, we are
downgrading our FY11E / FY12E estimates by 17% / 7% to Rs 28.7 / Rs 33.2. However we
maintain ACCUMULATE rating on the stock due to sharp correction in the stock price with a
price target of Rs 393.
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