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UBS Investment Research
Tata Chemicals
Gabon Urea investment—a positive
Gabon Urea investment—an attractive option
Tata Chemicals has signed an agreement with Olam and the Republic of Gabon
(ROG) to acquire a 25.1% equity stake in 1.3 mio tpa urea project in ROG for
US$290m. The project is estimated to cost US$1.3bn (to be funded at a
debt:equity of 65:35). Tata Chemicals will also provide project management
consultancy services as well as operation and maintenance (O&M) services for the
project. The company mentioned that investments in ‘stream 2’ will be done at par
with Olam and ROG.
Gabon acquisition to address concerns about ability to deploy capital
Our checks suggest investors are concerned about Tata Chemical’s ability to
deploy capital in new projects. We believe this investment addresses some of the
concerns.
Tata Chemicals to sell investments—a positive, in our view
Tata Chemicals plans to fund the acquisition through debt and the sale of
investments as well as through a preferential placement to Tata Sons. We think this
could be positive for sentiment.
Valuation
We retain our Buy rating, and our sum-of-the-parts based price target of Rs500.00.
At our price target, the stock is trading at 13% FY12E cash yield. Our estimates
and price target do not include any value creation from the Gabon Urea investment
Gabon investment—a positive
Tata Chemicals will invest US$290m in the urea project in the Republic of
Gabon (ROG). The project is part of a urea complex that is a JV between Olam
and ROG. The project details (from Tata Chemicals and Olam) are as follows.
Overall project capacity—1.3mio tpa for the first stream (in which Tata
Chemicals is investing.
Project costs—US$1.3bn. Proposed debt:equity ratio—65:35.
Tata Chemicals will invest US$290m for a 25.1% stake in ‘stream 1’.
‘Stream 1’ is estimated to generate an annual EBITDA of US$300-350m.
The project will enjoy tax holidays for the first 10 years and a concessional
tax rate of 10% after that.
Tata Chemicals will provide project consultancy and O&M services for the
project.
According to Olam, the JV has obtained insurance against potentially
insufficient gas availability.
Tata Chemicals will invest at par with Olam and ROG in ‘stream 2’ and will
hold a higher stake in ‘stream 2’ compared to ‘stream 1’.
We estimate the investment will generate 17% equity internal rate of return
(IRR) as shown in the following table. Assuming Tata Chemicals has a 25.1%
stake in ‘stream 2’ and invests in the project at par, the combined IRR for the
two streams will be 20%. Project management and O&M fees should also
enhance the IRR. Assuming Tata Chemicals gets 2% of capex as project
management consultancy fees and 2% of EBITDA as O&M fees (above their
costs); the project IRR would improve by 3%.
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. Khet-
Se Agriproduce, a 50:50 JV between Tata Chemicals and Total Produce, is a
fruit and vegetable sourcing, packaging and distribution company.
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
Gabon Urea investment—a positive
Gabon Urea investment—an attractive option
Tata Chemicals has signed an agreement with Olam and the Republic of Gabon
(ROG) to acquire a 25.1% equity stake in 1.3 mio tpa urea project in ROG for
US$290m. The project is estimated to cost US$1.3bn (to be funded at a
debt:equity of 65:35). Tata Chemicals will also provide project management
consultancy services as well as operation and maintenance (O&M) services for the
project. The company mentioned that investments in ‘stream 2’ will be done at par
with Olam and ROG.
Gabon acquisition to address concerns about ability to deploy capital
Our checks suggest investors are concerned about Tata Chemical’s ability to
deploy capital in new projects. We believe this investment addresses some of the
concerns.
Tata Chemicals to sell investments—a positive, in our view
Tata Chemicals plans to fund the acquisition through debt and the sale of
investments as well as through a preferential placement to Tata Sons. We think this
could be positive for sentiment.
Valuation
We retain our Buy rating, and our sum-of-the-parts based price target of Rs500.00.
At our price target, the stock is trading at 13% FY12E cash yield. Our estimates
and price target do not include any value creation from the Gabon Urea investment
Gabon investment—a positive
Tata Chemicals will invest US$290m in the urea project in the Republic of
Gabon (ROG). The project is part of a urea complex that is a JV between Olam
and ROG. The project details (from Tata Chemicals and Olam) are as follows.
Overall project capacity—1.3mio tpa for the first stream (in which Tata
Chemicals is investing.
Project costs—US$1.3bn. Proposed debt:equity ratio—65:35.
Tata Chemicals will invest US$290m for a 25.1% stake in ‘stream 1’.
‘Stream 1’ is estimated to generate an annual EBITDA of US$300-350m.
The project will enjoy tax holidays for the first 10 years and a concessional
tax rate of 10% after that.
Tata Chemicals will provide project consultancy and O&M services for the
project.
According to Olam, the JV has obtained insurance against potentially
insufficient gas availability.
Tata Chemicals will invest at par with Olam and ROG in ‘stream 2’ and will
hold a higher stake in ‘stream 2’ compared to ‘stream 1’.
We estimate the investment will generate 17% equity internal rate of return
(IRR) as shown in the following table. Assuming Tata Chemicals has a 25.1%
stake in ‘stream 2’ and invests in the project at par, the combined IRR for the
two streams will be 20%. Project management and O&M fees should also
enhance the IRR. Assuming Tata Chemicals gets 2% of capex as project
management consultancy fees and 2% of EBITDA as O&M fees (above their
costs); the project IRR would improve by 3%.
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. Khet-
Se Agriproduce, a 50:50 JV between Tata Chemicals and Total Produce, is a
fruit and vegetable sourcing, packaging and distribution company.
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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