Tata Chemicals-Dismal results :: Kotak Sec

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Tata Chemicals (TTCH)
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Dismal results validate our concerns of urea shortfall - highlighted post 1QFY11
results. TCL reported sales 13% higher than our est. due to (1) higher trading fertilizer
sales while (2) urea and India soda ash sales were lower than our est. PAT at Rs1.3 bn
missed our est. of Rs2 bn due to poor margin at 14% vs our est. of 19.5% resulting
from (1) lag in passing on energy cost increase in soda ash across all geographies,
(2) lower urea volume and (3) one-time costs. We lower FY2011-12E PAT by 20%-9%.
We see a strong downside risk to our FY2011E earnings in case there is shortfall in urea
production in 4QFY11E. Maintain REDUCE with PT of Rs370.








2QFY11 sales at Rs30 bn, 13% above our estimate due to higher fertilizer trading sales
Overall sales at Rs30 bn was 13% above estimates due to higher fertilizer sales on account of
higher trading sales. However, (1) urea sales volumes were lower than our expectations in what is
seasonally a strong quarter for fertilizers on account of shutdown of Babrala plant for a month
(greater then the 15-day shutdown outlined earlier) in order to bring the ammonia converter back
into action and (2) lower chemical sales in India on account of (1) poor soda ash sales volumes
at .15 mt (lowest in last 3 years) due to flooding at Mithapur plant and (2) lower soda ash
realizations. Phosphatics, GCIP and BMGL sales volumes were in line with our expectations.

PAT at Rs1.3 bn missed our est. of Rs2 bn due to poor margin at 14% vs our est. of 19.5%
PAT missed our estimate primarily on account of poor EBITDA margin at 14% vs our est. of 19.5%.
Margin declined in both soda ash and fertilizers due to (1) lag in passing on energy cost increases
in soda ash across all geographies, (2) adverse product mix in fertilizer with lower urea sales and
higher trading volumes, (3) cost pressure on phosphatics due to increase in phos. acid prices and
(4) one-time costs. This resulted in (1) higher material cost at 45%, up 800 bps yoy and (2) other
expenses were higher at Rs3.2 bn, 30% higher than our est. on account of one-time costs of
(1) MTM forex loss, (2) promotional expenses and (3) maintenance expenses at Babrala.


We lower FY2011-12E PAT by 16%-7%. We expect EPS of Rs28 in FY2011E and Rs36 in FY2012E
Our FY2011-12E estimates include the impact of new businesses of (1) specialty fertilizers,
(2) expanded salt capacity, (3) Swach, (4) debottlenecked capacity of 100,000 tons at GCIP and
(5) increase in soda ash prices taken in 3Q-4QFY11E to counteract energy cost increases. However,
we believe downside risk to our FY2011E earnings remains in case there is shortfall in annual urea
production of 1.2 mtpa. TCL reported urea sales volume of .5 mt in 1HFY11, down 20% yoy.
To achieve peak annual production of 1.2 mtpa, volumes in 4QFY11E, which is seasonally a weak
quarter, have to be strong at .354 mt, up 48% yoy.