Tata Chemicals Ltd. - GEPL Capital

Good, strong numbers; healthy growth across all businesses; but business environment continues to be challenging
- Tata Chemicals Ltd. (TCL) reported a topline of Rs.38,099 mn in Q3FY12 against Rs.28,909 mn in Q3FY11, growth of 32% Y-o-Y on the back of a strong 39% growth in the fertilizer segment.

- EBITDA grew 26% Y-o-Y to Rs.5,558 mn in Q3FY12 against Rs.4,414 mn in Q3FY11. However, a 39% Y-o-Y increase in raw material cost dragged EBITDA margin down by 78 bps to 14.6% in Q3FY12 against 15.4% in Q3FY11.

- Net profit was Rs.2,537 mn in Q3FY12 against Rs.2,087 mn in Q3FY11, a growth of 22% Y-o-Y. Net profit margin was 6.7%, 61 bps lower than that the margin of 7.3% in Q3FY11. This was due to a 39% increase in interest cost at Rs.1,111 mn. TCL also reported exceptional items of Rs.468 mn comprising of exchange loss (Rs.70.2 mn), asset impairment cost at Rallis' Turbhe facility (Rs.225.2 mn) and VRS cost (Rs.172.8 mn). Excluding the exceptional items, net profit margin showed a 90bps rise at 7.9% for Q3FY12.

Result Highlights

Wise move to exit from unfavorable businesses

During the quarter, TCL exited its 50:50 JV with Total Produce Ireland which had plans to set up sorting, grading, packaging and distribution centres due to unfavorable operations at the distribution centre in Punjab. It also shut its bio-fuels facility at Nanded since the price of sorghum does not look favorable as compared to selling price of bio-ethanol. TCL plans to either sell/lease the facility or shift it outside India. We see this exit from unproductive ventures as a positive move in the long run.

Soda ash showing signs of softening

TCL increased price of soda ash by about $20 per ton. Sales for soda ash were robust for Q3FY12, however, signs of slowdown are seen in China where inventory levels have increased and there is surplus. This could lead to soda ash prices softening in the weeks to come.

Fertilizers looking weak

Price of Di-ammonium Phosphate (DAP) has come down to $600/ton from $700/ton whereas Muriate of Potash (MoP) prices too have softened. During first half of the year, demand for DAP and MoP had come down due to rapid price increase. All this is expected to put pressure on margins.

Valuation & viewpoint

At the CMP of Rs.357, Tata Chemicals is trading at 10x and 9x its FY12E and FY13E consensus earnings estimates respectively. Considering the headwinds facing the industry currently with respect to fertilizer prices, soda ash demand softening, urea policy, etc., we advise investors to remain cautious on the stock in the near term.

Source : Equity Bulls

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