Tata Chemicals is not only expanding its core businesses, but is also diversifying into new areas. The stock is an excellent investment target for investors with a 12-month horizon
TATA CHEMICALS (TCL), one of the world’s largest manufacturers of soda ash, is benefitting from rising soda ash prices globally, while policy changes have boosted the profitability of its fertiliser business. It has embarked upon several capacity expansion projects and is diversifying into biofuels. TCL will reach new heights once these projects come on-stream in FY09. Consider investing in the company with a 12-month horizon.
Incorporated in 1939, TCL is India’s leading manufacturer of inorganic chemicals, fertilisers and food additives. The company, which is currently valued at a little over Rs 8,000 crore, reported consolidated net sales of Rs 5,800 crore for FY07. TCL acquired UK-based soda ash maker Brunner Mond in December ’05, which owns plants in the UK, the Netherlands and Kenya. It also holds one-third equity stake in a phosphoric acid manufacturing Moroccan company IMACID.
BUSINESS: TCL’s fertiliser manufacturing business contributes nearly 60% to its total revenues. It has a 0.87 million tonne per annum (mtpa) capacity of urea and 1.2 mtpa capacity of phosphatic fertilisers. TCL is also one of the world’s leading synthetic soda ash makers with a total combined capacity in excess of 3 mtpa and commands an 8% global market share. It has 50% share in the branded, iodised salt market in India. It is also aggressively optimising costs in a bid to sustain the competitive advantage in global markets.
GROWTH DRIVERS: Currently, TCL has gained, thanks to two favourable developments. The first of these is policyrelated: the quarterly system of calculating subsidy is now done on a monthly basis, and subsidy towards distribution cost has increased. This has resulted in higher and quicker receipts of subsidy payments from the government. TCL will also benefit from any further easing of the government’s fertiliser policy. The second factor is the global shortage of soda ash, which has boosted prices to new highs. Hence, soda ash prices, at $300 per tonne, are around 40% higher on a year-on-year (YoY) basis.
TCL also has aggressive growth plans. Debottlenecking projects are under way at its urea as well as inorganic chemicals plants, which will be completed by September ’08. This will boost TCL’s domestic soda ash capacity by 30% and urea capacity by 60%. Even the cement and salt capacities will go up. These additional capacities, when fully functional, will add over Rs 1,100 crore in revenues annually.
Besides India, TCL aims to expand its presence in the global soda ash business as well. It recently expanded its soda ash capacity in Kenya, which is one of the lowest cost producers of soda ash in the world. The company plans to set up another plant there. Besides its existing business, TCL is also diversifying into new areas. Biofuels is one such business it is bullish on.
The company is setting up a 30-kilolitres-per-day (klpd) sweet sorghum-based ethanol facility at Nanded in Maharasthra. This facility is being set up as a prototype, which, if works well, can be expanded to 100 klpd in future. It has also formed a company called ‘Khet-Se Agriproduce India’, in a 50:50 joint venture with Total Produce of Ireland, to foray into wholesaling agricultural commodities — one of the fast-growing business opportunities in India.
FINANCIALS: TCL reported a healthy 26.1% growth in net profit in H1 FY08 on a consolidated basis, despite a mere 2% sales growth. It also expanded its operating margins, thanks to stringent cost management. The performance would have been even better, had it not been for exceptionally heavy rains in Gujarat, which affected the production at its plants. TCL posted 18.6% YoY growth in net profit and 43.9% YoY growth in sales for the year ended March ’07.
VALUATIONS: At the current market price of Rs 360, the scrip is trading at around 13.8 times its consolidated EPS for trailing 12 months at Rs 26.1. Based on the estimated forward EPS of Rs 35.2 for FY09, the P/E will be 10.2. This is highly attractive, considering TCL’s current performance, as well as expansion plans. Being a Tata group company, TCL holds equity stakes in most of the group companies such as Tata Motors, Rallis India, TCS, Tata Tea and Tata Steel, among others. The current market value of these listed investments accounts for roughly one-fifth of TCL’s total market capitalisation. Considering all these aspects, we believe TCL is an excellent investment target for investors with a 12-month horizon.
RISKS: The newly expanded soda ash capacity in Kenya is currently facing some technical problems and is running only at 30-40% capacity. Full benefits of this facility may not be available till the end of FY08. Any significant fall in global soda ash prices may have a negative impact on the company’s growth.
POTENT MIX
TCL is present in all three key agro-nutrient segments in the fertiliser business — nitrogen (N), phosphorous (P) and potassium (K) Easing of government’s fertiliser subsidy payment policy has had a positive effect on TCL’s cash flows It is diversifying into the biofuel business and wholesaling of agro-products Debottlenecking projects will add around Rs 1,100 crore to sales on completion TCL has set up an innovation centre at Pune to explore new business areas in nano and biotech space TCL operates ‘Tata Kisan Sansar’ network of 514 outlets in North and East India to provide agri-inputs to farmers TCL’s ‘Khet-Se’ initiative involves setting up collection and processing centres, as well as a cold chain for the distribution of fresh vegetables and fruits Tata Salt controls over 50% market share in the branded salt segment in India TCL’s production at the Mithapur plant was affected during the quarter ended September ’07 due to heavy rains and technical problems
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