Tata Chemicals: Investment income saves bottomline
A 35% decline in the net profit despite over 1173 m of income accruing from the sale of investments tells the story of the year gone by for Tata Chemicals.
Though dumping from China affected the margins in soda ash, the fact remains that the lack of growth in the industrial production led to the over capacity situation persisting in the industry. Margins would only improve once the industry utilises the full capacity set up. The absence of big buyers such as Nirma who have backward integrated into soda ash has further exacerbated the situation.
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As far as the fertliser division though sales and profit are stated to be higher than those achieved last year, the fact remains that the fertliser companies such as Tata Chemicals book sales at retention prices and the difference between the retention prices and selling prices is shown as dues receivable from the government. During the last year the government notified the retention price for 1994-95 and 1995-96 and since the notified price was lower than what the company had booked in its turnover for those years, the company had to provide for Rs 800 m as a contingency provision. In the current year, Tata Chemicals has already provided for contingencies amounting to Rs 1200 m from the current year's profit. This infact is more than the net profit for the year and actually seems to be a provision for any shortfall in the notified retention price and the selling price for the previous two years.
The stock however seems to have factored these developments. Tata Chemicals quotes at Rs 41, which implies an earning multiple of 6.3x the FY2000 earnings.
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