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Tata Chemicals: Growth on track

May 13, 2003

Tata Chemicals recently declared its FY03 and March quarter results, posting a tremendous jump (150%) in its bottomline for the March quarter, but the topline growth for the quarter has been sluggish. However, net sales growth of 14% for the full year has been impressive. Let's take a deeper look at the performance of the company during FY03.

(Rs m) 4QFY02 4QFY03 ChangeFY02FY03Change
Net Sales 3,676 3,791 3.1% 14,339 16,284 13.6%
Other Income 565 258 -54.3% 822 788 -4.1%
Expenditure 3,007 3,002 -0.2% 10,581 12,116 14.5%
Operating Profit (EBDIT) 669 789 17.9% 3,758 4,168 10.9%
Operating Profit Margin (%) 18.2%20.8% 26.2%25.6% 
Interest 174 193 10.4% 1,100 901 -18.1%
Depreciation 345 350 1.4% 1,332 1,370 2.8%
Profit before Tax 714 505 -29.4% 2,148 2,685 25.0%
Extraordinary items (40) 104 -360.3% (148) (5)-96.5%
Tax 433 7 -98.5% 732 713 -2.7%
Profit after Tax/(Loss) 241 602 149.6% 1,268 1,967 55.1%
Net profit margin (%) 6.6%15.9% 8.8%12.1% 
No. of Shares (m) 180.7 180.7   180.7 180.7  
Diluted earnings per share* (Rs)5.3413.33 7.0210.89 
P/E ratio (x)    6.2 
(* annualised)      

At first glance net profit for the full year has grown by 55%, which is commendable given the fact that the Indian economy is going through a phase where GDP which was expected to grow at over 5% in FY03 was revised to 4.4% at the end of the fiscal. The strong growth can be attributed to the aggressive marketing and revamping of sales & distribution initiatives taken up by Tata Chemicals like the Tata Namak brand (salt business) as a result of which its market share was at 38% for FY03. The company already has a strong presence in the southern region. In the soda ash segment, the company produces 42% of India's total output and has a 34% market share. Exports in this segment has gone up 197%. Due to these initiatives the topline for the full year has grown by 14% YoY.

Merger with Hind Lever Chemicals (HLCL) will help the company in reaching out to different geographies as HLCL has a strong presence in the eastern region, while Tata Chemicals has a strong presence in the western region. In order to tap the southern market in the fertilizer segment the company has already integrated the marketing services of Rallis India (a Tata group company).

While the company has been able to successfully bring down its expenses relating to power consumption it seems to have lost out on other expenses. The company's other expenses now constitute nearly 32% of total sales (27%), while power costs as a percentage of total revenues have fallen to 15% (16%). Increase n other expenses have adversely impacted operating margins, which have fallen by 60 basis points.

At the pre-tax level interest cost has come down by 18% as the company has been able to retire debt from Rs 10.6 bn in FY02 to Rs 8.2 bn in FY03. Apart from this the company has also prepaid high cost debt amounting to Rs 50 m. Due to these initiatives, the average cost of borrowings has gone down from 11.2% in FY02 to 9.7% in FY03. Performance of the company indicates that it has made a conscious effort to improve efficiencies. This coupled with the lower interest rates has helped the company to post a healthy growth in bottomline. However the bottomline has also been aided by a Rs 260 m write-back on account of provision created for contingencies.

At present market price it is at Rs 68, the stock trades at a P/E multiple of 6x its FY03 earnings. Tata Chemicals continues in its effort of improving operating efficiencies by cost reduction and exploring new geographies. The proposed merger with Hind Lever Chemicals would also add impetus to its efforts of increasing market share and augur business development. But we believe that the stock could languish at these levels until there is more clarity on the merger.

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