Maintain Accumulate on Tata Chemicals - Prabhudas Lilladher

Better‐than‐expected Q2FY12 result: Tata Chemical's (TCL's) net sales grew by 19.7% YoY to Rs35.7bn (PLe: Rs31.3bn), primarily led by better volumes and realization in both, the businesses i.e. inorganic chemical and fertilizers. EBITDA grew by 57.3% YoY to Rs6.7bn (PLe: Rs6.1bn). PAT grew by 134.3% YoY to Rs2.9bn (PLe: Rs2bn).

Inorganic chemical's sales grew by 27.2% YoY to Rs16.4bn, primarily on account of better volume (soda ash volume up by 4.2% YoY and 3.2% QoQ) growth and realization across the geographies. Fertilizer sales grew by 13.7% YoY to Rs14.2bn on account of higher volume (urea volume up by 16.3% YoY despite having shut down of plant for 15 days) during the quarter and higher farm-gate prices of non-urea fertilizers. EBIT margin of inorganic chemicals and fertilizer stood at 21.4% and 10.9%, respectively. Company has received subsidy related to earlier years during Q2FY12. Hence, fertiliser calculated EBIT stood at 9.1%. Company has provided MTM forex loss on its loan of Rs472.7m and has profit on sale of investment of Rs305.1m (considered as exceptional item). Hence, reported PAT stood at Rs2.8bn.

Key Highlights for the quarter: During Q1FY12, company has not recognized subsidy income of Rs14cr (H1FY12: Rs45cr) on opening stock of raw materials for non-urea fertilizers according to DoF. Company has increased strategic stake in EPM Mining Ventures Inc. to 30.6% to secure supplies and access low cost sulphate of potash. TCL has formed joint venture with FMC Corporation and Church & Dwight to set up a 4.5Lac TPA manufacturing facility to produce Trona sorbents with an investment of US$60m.

Maintain 'Accumulate': Post several weak quarters, TCL has reported strong performance during Q2FY12. We are cautious and believe that Soda Ash business could face challenge on account of rising input cost and slow down in Europe/US primarily in Auto/Infrastructure sector, going forward. Further, we expect that company's agri input business would perform better in short/medium term, primarily on account of better Rabi crop prospect in India. At present, stock is trading at stock is trading at one year forward P/E of 8.6x v/s 5year band of 7x-11x. We maintain our 'Accumulate' rating on the stock, with the target price of Rs405. (i.e. 10.5xFY13E EPS).

Source : Equity Bulls

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