Focus on core businesses, capacity expansion in key products — soda ash and salt — and reasonable valuations make Tata Chemicals a good investment idea from a two-to-three year perspective.
At the current price of Rs 317, the stock looks attractive at eight times its estimated FY-14 earnings. Over the last five years, the company has consistently paid dividends to shareholders. It declared 100 per cent dividend in 2011-12, translating into a dividend yield (dividend as a percentage of the current stock price) of 3 per cent.
INORGANIC CHEMICALS LOOKING UP
Tata Chemicals is the world’s second largest soda ash producer, with an annual production capacity in excess of 50 lakh tonnes, spread across India, the US, Africa and the UK. Acquisition of the UK-based Brunner Mond in December 2005 and the US-based General Chemical Industrial Products (GCIP) in March 2008 helped the company gain a global footprint.
Over 60 per cent of Tata Chemicals’ soda ash production is based on low-cost, naturally mined raw material, namely trona. This gives the company an edge over synthetic soda ash manufacturers. But the US, being the world’s leading natural soda ash manufacturer, plays a significant role in determining the international prices.
After a lull in 2011, the international prices of soda ash gained strength in the last six months. In light of this, Tata Chemicals took price increases in the domestic market recently. Soda ash production in the June quarter was impacted by unprecedented floods at the company’s Magadi facility in Kenya. Normalcy has since been restored there. Also, the full benefits of improved realisations and marginal capacity augmentation in the US by 1 lakh tonne (~2 per cent of overall capacity) may improve Tata Chemicals’ revenues and profits in 2013. But, aggressive expansion plans by Turkish players, eyeing additional three million tonnes by 2015 remains a threat to international soda ash prices.
STEADY UREA BUSINESS
Tata Chemicals is the most efficient urea producer in the country with production in excess of one million tonnes. Its superior energy efficiency translates into better margins.
Strong demand and reimbursement of the cost escalations by the Government lend stability to the business with steady cash flows. Urea production was lower in the June quarter on account of a month long planned shutdown to replace ammonia converters. The plants have been re-commissioned and production has stabilised.
Tata Chemicals also manufactures complex fertilisers such as di-ammonium phosphate (DAP), other NPK grades and single super phosphate (SSP) at its Haldia facility in West Bengal. Complex fertiliser production was halted completely for almost three months as phosphoric acid price negotiations with its major supplier fell through.
However, the plant resumed operations in early June. While the increase in the retail prices of complex fertilisers and the delayed monsoon may lead to a slump in fertiliser sales, pick up in rainfall over the last few weeks may support sales in the ensuing rabi (winter) sowing season.
In addition to price-controlled fertilisers, Tata Chemicals also produces and sells high-margin customised fertilisers, micro nutrients and other crop nutrients.
Benefits for the company from its acquisition of majority stake in the pesticide major Rallis India (also a Tata Group company) in 2009 extend beyond financial consolidation. Through Rallis, the company gains access to over five lakh farmers, 2,300 distributors across the country and over 40,000 dealers covering over 80 per cent of the country’s total arable landscape.
Rallis’ revenues grew over 16 per cent in the June quarter to Rs 347 crore; profits though remained flat at Rs 12 crore due to lower margins.
Tata Chemicals is the country’s leading salt producer with over 64 per cent share in the market. Strong brand recall coupled with new introductions has helped the brand stay ahead of competition. The company’s pulses brand, I-Shakti, which is currently marketed in 21 States achieved break even during the year.
The company’s decision to suspend operations of Khet-se, an agri produce joint venture, and to consider divestment of its jatropha seedling joint venture, suggests a welcome change in the strategy to move away from non-core businesses.
INVESTMENTS ON TRACK
Tata Chemicals plans to set up a one-million tonne brownfield urea plant at Babrala, Uttar Pradesh, and is awaiting a favourable policy announcement to firm up the proposal. In 2011, the company announced investment of $290 million (Rs 1,600 crore) to acquire 25.1 per cent stake in a 1.3-million tonne urea plant being set up in Gabon, Africa. Tata Chemicals has an option to sell up to 25 per cent of the output in the Indian market, subject to the Indian Government liberalising urea imports. The project is expected to be completed in two years and has the potential to add $75 million (Rs 415 crore) to the company’s operating profits.
FINANCIALS
Tata Chemicals’ revenue in the June quarter grew by a sedate 3.6 per cent to Rs 3,066 crore over the same period last year. Lower fertiliser and soda ash volumes contributed to the weak growth.
As a result, the company’s operating margins declined by 1.8 percentage points to 16.1 per cent and net profit declined 16 per cent to Rs 272 crore. The company’s net debt (total debt minus cash and cash equivalents), as a percentage of equity, stood at 0.55 as on June 30, 2012.
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