The stock of Tata Chemicals may be a good investment option for conservative investors with a two-year horizon. The prospect of continuing volume gains in the fertiliser business, strong growth in the chemicals business as recent global acquisitions begin to contribute and ongoing capex plans, suggest that the company may sustain strong earnings growth over the next two-three years.
At the current market price of Rs 244, the earnings expectations factored into the stock price are also modest, with the stock trading at just 12 times its 2006-07 earnings. A dividend yield of 3.3 per cent also provides cushion against significant downside.
The company’s soda ash business has delivered strong profit growth in 2006-07 on the back of firmer global prices and higher offtake from domestic glass manufacturers. The global soda ash cycle appears to be on a recovery phase currently, helped by strong offtake in the Asian region, tighter supplies and a rationalisation of capex in and exports from China. Tata Chemicals’ acquisition of the UK-based Brunner Mond group in 2006 has made it the third largest global producer of soda ash and enabled access to large sources of natural soda ash.
These will significantly reduce the company’s cost structure and strengthen its competitive edge in supplying to the domestic markets and the Asian region. With the company making ongoing investments in its acquired facilities, earnings contributions from the overseas business may scale up significantly over the next two years. Funding for the capex plans may raise debt levels, but strong cash coffers and a comfortable interest cover suggest room in the balance sheet for such plans.
Meanwhile, prospects for the domestic fertiliser business are also looking up, to some degree, with a higher share of the domestic sales going to the more efficient players. The new pricing policy for urea has helped the company embark on a 40 per cent expansion in urea capacity to be commissioned over the next 18-24 months.
Tata Chemicals’ business forays into establishing a supply chain for agricultural produce and its food additives business also have good potential. The company’s consolidated operations registered a 44 per cent growth in sales to Rs 5,810 crore and a 19 per cent increase in net profit in 2006-07, translating into earnings per share of Rs 23.6 (Rs 20.9, on a fully diluted basis).