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UBS Investment Research
Tata Chemicals
Last quarter of Fuel cost increase hit
„ Fuel cost increase continued to impact Q3FY11 results
While TTCH has taken Soda Ash price increases, they will be applicable starting
Jan 2011. Fuel cost increase continued to hurt Q3FY11 performance. The Soda
Ash price increases will fully roll in during Q4FY11. Soda Ash price increases in
US, UK, Kenya and India will aid operating margins in Q4FY11.
„ Urea plant has stabilized
TTCH faced Urea debottlenecking issues in Q1 and Q2 FY11. The plant stabilized
in Q3FY11 and is producing at peak capacity. The company expects to 150-200 K
MT of Urea on IPP linked prices. International Urea prices have increased 370-
380 $/MT (FOB Middle East). We expect TTCH to post higher Urea realizations
in Q4FY11 on the back of IPP linked prices.
„ High phosphoric acid prices may hurt complex fertilizer division
Phosphoric acid prices have increased while the Government has reduced the
subsidy under NBS scheme. There is a risk that if phosphoric acid prices stay
high, the producers may not be able to pass through higher prices to consumers.
„ Valuation
We retain our Buy rating and SOTP based Rs.500 price target. At our target price
TTCH trades at 14% cash yield.
Soda Ash price increases to improve operating
performance in Q4FY11 and FY12
TTCH has taken Soda Ash price increases and the company expects them to be
effective starting Jan 2011. We estimate that the Soda Ash price increase will
more than compensate for increase in fuel costs as shown below.
Fertilizer division – mixed outlook
Urea – production stabilization and price improvement
to improve operating performance
TTCH faced production issues in Q1 and Q2 FY11. But the Urea capacity has
stabilized and producing at peak capacity. TTCH expects to sell 150-200 K
tonnes on IPP linked prices in Q4FY11. International Urea prices have
increased to US$370-380/MT. In FY12, TTCH will be able to sell 300-350 K
tonnes of Urea at IPP linked prices. We expect this to boost operating
performance of the Urea plant. In our model we assume a long term price of
US$300/MT.
Complex fertilizers – company unsure about ability to
pass high phosphoric acid prices in reduced subsidy
regime
Phosphoric Acid prices have increased to US$820/MT. The government has
reduced subsidy on complex fertilizers. The company believes it can reduce
contribution margins from complex fertilizers. We model reduction in
contribution from Rs2500/MT to Rs2000/MT.
Valuation
We continue to value Tata Chemicals on SOTP based methodology. At our
target price TTCH trades at 14% cash yield
Q Tata Chemicals
Part of the Tata Group, Tata Chemicals operates in two segments: inorganic
chemicals (70% of overall revenue) and fertilizers. Inorganic chemicals includes
soda ash, and Tata is the second largest producer in the world after the
acquisition of GCIP in March 2008. The fertilizer business includes urea (12%
of India's capacity) and phosphatic fertilizers. The company is the largest salt
manufacturer in India with c50% share of the branded iodized salt market. KhetSe Agriproduce, a 50:50 JV between Tata Chemicals and Total Produce, is a
fruit and vegetable sourcing, packaging and distribution company.
Q Statement of Risk
Tata Chemicals is present in two areas—soda ash and fertilisers. We believe the
main risk in the soda ash business is low capacity utilisation and low realisations
due to economic slowdown. In fertilisers, it is exposed to regulatory risk.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Tata Chemicals
Last quarter of Fuel cost increase hit
„ Fuel cost increase continued to impact Q3FY11 results
While TTCH has taken Soda Ash price increases, they will be applicable starting
Jan 2011. Fuel cost increase continued to hurt Q3FY11 performance. The Soda
Ash price increases will fully roll in during Q4FY11. Soda Ash price increases in
US, UK, Kenya and India will aid operating margins in Q4FY11.
„ Urea plant has stabilized
TTCH faced Urea debottlenecking issues in Q1 and Q2 FY11. The plant stabilized
in Q3FY11 and is producing at peak capacity. The company expects to 150-200 K
MT of Urea on IPP linked prices. International Urea prices have increased 370-
380 $/MT (FOB Middle East). We expect TTCH to post higher Urea realizations
in Q4FY11 on the back of IPP linked prices.
„ High phosphoric acid prices may hurt complex fertilizer division
Phosphoric acid prices have increased while the Government has reduced the
subsidy under NBS scheme. There is a risk that if phosphoric acid prices stay
high, the producers may not be able to pass through higher prices to consumers.
„ Valuation
We retain our Buy rating and SOTP based Rs.500 price target. At our target price
TTCH trades at 14% cash yield.
Soda Ash price increases to improve operating
performance in Q4FY11 and FY12
TTCH has taken Soda Ash price increases and the company expects them to be
effective starting Jan 2011. We estimate that the Soda Ash price increase will
more than compensate for increase in fuel costs as shown below.
Fertilizer division – mixed outlook
Urea – production stabilization and price improvement
to improve operating performance
TTCH faced production issues in Q1 and Q2 FY11. But the Urea capacity has
stabilized and producing at peak capacity. TTCH expects to sell 150-200 K
tonnes on IPP linked prices in Q4FY11. International Urea prices have
increased to US$370-380/MT. In FY12, TTCH will be able to sell 300-350 K
tonnes of Urea at IPP linked prices. We expect this to boost operating
performance of the Urea plant. In our model we assume a long term price of
US$300/MT.
Complex fertilizers – company unsure about ability to
pass high phosphoric acid prices in reduced subsidy
regime
Phosphoric Acid prices have increased to US$820/MT. The government has
reduced subsidy on complex fertilizers. The company believes it can reduce
contribution margins from complex fertilizers. We model reduction in
contribution from Rs2500/MT to Rs2000/MT.
Valuation
We continue to value Tata Chemicals on SOTP based methodology. At our
target price TTCH trades at 14% cash yield
Q Tata Chemicals
Part of the Tata Group, Tata Chemicals operates in two segments: inorganic
chemicals (70% of overall revenue) and fertilizers. Inorganic chemicals includes
soda ash, and Tata is the second largest producer in the world after the
acquisition of GCIP in March 2008. The fertilizer business includes urea (12%
of India's capacity) and phosphatic fertilizers. The company is the largest salt
manufacturer in India with c50% share of the branded iodized salt market. KhetSe Agriproduce, a 50:50 JV between Tata Chemicals and Total Produce, is a
fruit and vegetable sourcing, packaging and distribution company.
Q Statement of Risk
Tata Chemicals is present in two areas—soda ash and fertilisers. We believe the
main risk in the soda ash business is low capacity utilisation and low realisations
due to economic slowdown. In fertilisers, it is exposed to regulatory risk.
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