Tata Chemicals

The Tata Chemicals stock appears to be a good option for investors with a three-year horizon. At its current price of Rs 363, the stock trades at modest price-earnings multiple of 11 times its consolidated earnings for the past year and about 10 times the estimated earnings for 2011-12.



The outlook for the company's fertiliser business (36 per cent of sales) is bright due to the large supply deficit for nutrients in the Indian market, the company's low-cost production capabilities and a more liberal policy environment. Prospects for the soda ash business (45 per cent of sales) are also looking up on better demand and pricing for soda ash in recent months.

Tata Chemicals' acquisition of a controlling stake in Rallis India, forays into specialty fertilisers and biofuel businesses, and success in the consumer segments where it is present (Tata Salt and Swach water purifiers) also add new growth engines for the medium term.

Tata Chemicals' consolidated numbers for 2009-10 (sales down 25 per cent and profits down 12 per cent) were muted due to factors such as lower fertiliser and soda ash realisations, one-off disruptions in production and write-offs due to closure of Dutch soda ash operations.

The numbers over the past two quarters, however, show a significant improvement on all counts. Strong agri-input sales, lower costs in the fertiliser business and better realisations and volumes on soda ash lifted the company's profits before exceptional items for the June quarter by 24 per cent compared to last year, even as sales grew at a modest 6 per cent.

Sales growth may accelerate from here on, as normal operations resume at the fertiliser units and the agri-input sales benefit from a rebound in this year's monsoon. Over the medium-term, favourable policy changes for fertilisers — the shift to nutrient-based subsidy, cash subsidy payments and stepped up gas allocations for urea — remove many of the nagging uncertainties that have been major constraints to growth in the fertiliser business. In soda ash, the geographic diversity of Tata Chemicals' operations (Mithapur – India, Brunner Mond – the UK and General Chemicals- the US) has helped it tide over a difficult 2009-10.

The price outlook for soda ash is now improving on the back of supply tightness in the US and the imposition of safeguard duty in the domestic market. European soda ash operations do remain vulnerable to weak offtake; however the company's low-cost advantage may enable better profitability in quarters ahead.

After loan repayment over the past year, Tata Chemicals now operates at a comfortable net debt:equity of 0.7:1. This, combined with strong cash flows and a sizeable investment book (Rs.30/share excluding Rallis), suggests that bankrolling the proposed fertiliser expansion plans will not be a major problem.

via BL