Tata Chemicals Ltd - Research Report

Private Client Research

Rating

Buy

Sector

Fertilizers

Company

Tata Chemicals Ltd

Fertilizers


August 18, 2017

Sensex: 31524.68


CNX Nifty: 9837.40

NSE: TATACHEM


BSE: 500770

Reco Price
Rs. 593.00
Price Target (1 Year)
Rs. 715.00
Upside
20.57%

Date

August 18, 2017

Sensex

31524.68

CNX Nifty

9837.40

Exchange

Code

NSE

TATACHEM

BSE

500770

Stock Data

CMP (Rs)
592.70
Face value (Rs)
10
52 Week Range (Rs)
666.50 - 444.50
Market cap (Rs Crores)
15089.21
Price To Book Value (x)
1.86
P/E Ratio (x)
15.64
EV/EBIDTA (x)
9.25

One Year indexed Stock Performance

Tata Chemicals Ltd Sensex
 Tata Chemicals Ltd
Return (%)
1m
3m
12m
36m
Absolute
-4.86
4.11
14.49
58.43
Sensex
-0.59
9.99
12.09
19.45

Shareholders

(in %)
30-Jun
Promoter
30.80
Public
69.20
Others
0.00
Total
100

+91 22 6639 3000

research@stockaxis.com

Better working capital management and increase in contribution from consumer business to drive future growth of the company.

Increase in contribution of Consumer business:
Contribution of consumer business in Tata Chemicals (TCL’s) consolidated revenues is likely to increase due to:
(1) Strong expected growth in the consumer piece and
(2) Exit from the urea business.

Salt business, a segment of the consumer division, commands much higher margins and return ratios versus TTCH’s overall business, on account of its strong brand positioning and negligible working capital requirements. The sourcing and processing of the pulses, spices and other products are also completely outsourced, enabling TTCH to grow without heavy investments. Growing share of consumer business in TTCH’s overall revenues, hence, should enable gradual improvement in TCL’s overall margins and return ratios.

Anti-dumping duty likely to be withdrawn by Q1FY18:
Anti-dumping duty (ADD) is likely to be withdrawn by Q1FY18. This could lead to a drop in domestic realizations and would increase prices of imports into India. For Tata Chemicals, loss in domestic production will be compensated by higher imports from its Magadi and US facilities. However, the commissioning of new facility in Turkey would impact prices by $10-15. This could be balanced in case there are capacity shut downs in China and Europe as is being anticipated.

Consolidated debt to decline, led by better working capital management:
Consolidated debt as of Q3FY17 end stood at Rs. 5880 crores compared to Rs. 7830 crores as of FY16 end, which is a reduction of Rs. 1950 crores. The reduction in debt levels was driven by efficient management of debtor and inventory, especially in the fertilizer business. Lower sales of fertilizers and reduction in production during the year reduced inventory days for the company. This year, the company started production closer to the Rabi season and thus was able to convert inventory into cash, faster. The company has also repaid $60 Million worth ECB loans in October 2016. The management has indicated that there could be further reduction in debt going forward.

Healthy volumes in US to drive revenue growth:
Consolidated debt as of Q3FY17 end stood at Rs. 5880 crores compared to Rs. 7830 crores as of FY16 end, which is a reduction of Rs. 1950 crores. The reduction in debt levels was driven by efficient management of debtor and inventory, especially in the fertilizer business. Lower sales of fertilizers and reduction in production during the year reduced inventory days for the company. This year, the company started production closer to the Rabi season and thus was able to convert inventory into cash, faster. The company has also repaid $60 Million worth ECB loans in October 2016. The management has indicated that there could be further reduction in debt going forward.

The management has indicated that prices of soda ash in North America have not increased despite prices increasing in South East Asia due to the expectation of new capacity coming in Turkey by the end of this year.

Change in business strategy in fertilizer segment based on demand cycle:
Management has indicated that it will operate the fertilizer plant only when it is profitable to do so. The production will be done closer to the demand cycle, while during off-season, production will be curtailed in order to avoid building up high inventories. This will reduce working capital requirement and will not lock up cash. This will also mean that the fertilizer segment’s performance will fluctuate, since during periods when the plant is closed, profitability will be hit due to fixed costs. However, when the plant is operational, revenues and profitability will surge.

 

Industry

India’s chemical operations continued strong focus on operational efficiencies and lower energy cost which contributed to improved profitability of the business in a mixed business environment.

Soda Ash - Emerging economies have been the primary growth driver for soda ash over the past decade with increasing glass and detergent usage. However, FY16 witnessed demand slowdown in key markets including China and India. Global soda ash demand remained flat but going forward, world demand is forecast to grow at 2.5% p.a. through 2020.

Sodium Bicarbonate - Sodium bicarbonate is commonly used as an ingredient in leather tanning, dyes & textiles, food additives, animal feed, pharmaceuticals and air pollution control. The Company is the world’s fourth largest producer of sodium bicarbonate and is the market leader in India and UK.

Fertilizer business and other Agri inputs - The fall in overall food grain production in FY14-15 at about 4.9% was exceptionally sharp. However, it is heartening that the fall has not only been arrested in FY15-16, but may actually witness some growth, due to a comparatively better Rabi season.

Profile

Tata Chemicals Ltd. is a part of the over $100 Billion Tata Group, Tata Chemicals Limited is a global company with interests in businesses that focus on essentials for LIFE: Living, Industry and Farm Essentials.

Tata Chemicals is the world's second largest producer of soda ash with manufacturing facilities in Asia, Europe, Africa and North America. The company's industry essentials product range provides key ingredients to some of the world's largest manufacturers of glass, detergents and other industrial products

TCL is market leader in iodised salt segment and leading manufacturer of urea and phosphatic fertilizers. Its urea plant in Babrala in Uttar Pradesh is most energy efficient fertilizer plant in country.

The Tata Chemicals Innovation Centre is home to world-class R&D capabilities in the emerging areas of nanotechnology and biotechnology. The company's Centre for Agri-Solutions and Technology provides advice on farming solutions and crop nutrition practices.

Profit & Loss Statement:- (Consolidated)

(Rs Crores)

Particulars Mar-14 Mar-15 Mar-16 Mar-17 Mar-18E
Net Sales 15885.35 17204.48 17708.14 13473.60 15011.60
Growth (%) - 8.30 2.93 -23.91 2.00%
Total Expenditure 14075.75 15040.19 15542.97 11295.00 12533.00
EBITDA 1809.60 2164.29 2165.17 2178.60 2478.60
Margin (%) 11.39 12.58 12.23 16.17 16.51
Other Income 142.42 117.97 122.59 130.00 150.00
Operating Profit 1952.02 2282.26 2287.76 2308.60 2628.60
Interest 579.46 460.90 551.75 375.00 400.00
PBDT 1372.56 1821.36 1736.01 1933.60 2228.60
Depreciation 471.24 463.14 464.61 465.00 520.00
Profit Before Taxation & Exceptional Items 901.32 1358.22 1271.40 1468.60 1708.60
Exceptional Income / Expenses -1420.21 -199.71 0.00 0.00 0.00
Tax 288.78 351.12 291.53 396.52 461.32
Profit After Tax -807.67 807.39 979.87 1072.08 1247.28
Minority Interest -221.00 -205.53 -196.56 -240.00 -227.00
Share of Associate -3.33 -5.40 -3.15 -3.45 -4.01
Consolidated Net Profit -1032.00 596.46 780.16 828.63 1016.27
Adjusted EPS -40.51 23.41 30.62 32.53 39.89
Source: Stockaxis Research, Company Data

Valuation

Focus on cash generation potential of TTCH’s soda ash business (domestic and overseas) and high growth and margins profile of its consumer business will lead the future growth of the business.

We Initiate ‘BUY’ on attractive valuations with Target Price of Rs 715 based on 17.90x FY18E EPS. The stock trades at 14.90x FY18E EPS.