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Tata Chemicals: The bad effect of goodwill
Jun 5, 2014

Tata Chemicals has announced its March quarter results. The company has reported consolidated topline growth of 11% YoY while a loss has been reported at the net profit level

Performance summary
  • Consolidated topline for the quarter grows 11% YoY, standalone topline grows 4% YoY
  • Operating margins on a consolidated basis shrink by 5.5%, leading to a 32% drop in operating profits
  • Bottomline goes into the red on the back of poor operating performance and extraordinary loss to the tune of Rs 13 bn
  • Net profits on a standalone basis slump 49% YoY on the back of poor operating performance and lower other income
  • Consolidated profits for the full year goes in the negative despite a 8% growth in topline

  Consolidated Standalone Consolidated
(Rs m) 4QFY13 4QFY14 Change 4QFY13 4QFY14 Change FY13 FY14 Change
Net sales 33,283 36,950 11.0% 19,329 20,057 3.8% 147,110 158,954 8.1%
Expenditure 28,578 33,756 18.1% 17,508 18,384 5.0% 125,481 140,860 12.3%
Operating profit (EBDITA) 4,706 3,194 -32.1% 1,821 1,673 -8.1% 21,629 18,094 -16.3%
EBDITA margin (%) 14.1% 8.6%   9.4% 8.3%   14.7% 11.4%  
Other income 1,879 615 -67.3% 1,456 801 -45.0% 4,178 1,424 -65.9%
Interest (net) 1,067 1,213 13.7% 455 536 17.8% 4,639 5,793 24.9%
Depreciation 1,191 1,141 -4.2% 429 385 -10.3% 5,339 4,712 -11.7%
Profit before tax 4,326 1,455 -66.4% 2,392 1,553 -35.1% 15,829 9,013 -43.1%
Extraordinary items (5,146) (13,035) 153.3% (310) (593)   (6,699) (14,202)  
Tax 684 249 -63.6% 484 148   3,025 2,888 -4.5%
Profit after tax/(loss) (1,504) (11,829)   1,598 811 -49.2% 6,105 (8,077) -232.3%
Share of loss of associate 11 8 -28.3% - -   31 33  
Minority Interest 366 421 15.1% - -   2,070 2,210  
Net profit after minority interest (1,880) (12,257)   1,598 811 -49.2% 4,004 (10,320) -357.7%
Net profit margin (%) -5.6% -33.2%   8.3% 4.0%   2.7% -6.5%  
No. of shares (m) 254.8 254.8   254.8 254.8   254.8 254.8  
Diluted earnings per share (Rs)*               (40.5)  
Price to earnings ratio (x)*               n.a.  
(* on trailing twelve months earnings)

What has driven performance in 4QFY14?

  • The 10% growth in consolidated topline was a combination of 16% growth of the inorganic chemicals segment and 20% growth posted by the agri segment of the company. The fertilisers segment on the other hand, witnessed a fall of 3% YoY.

  • As per the company, soda ash demand continues to be robust. Markets both here and internationally are looking stable and the firm remains positive on the demand scenario going forward domestically as well as internationally.

  • As far as other segments are concerned, fertilisers witnessed a minor fall of 3% on a consolidated basis. As per the company this was due to the business getting affected on account of restricted capacity utilization at Babrala due to lack of clarity on policy and gas cost reimbursement on the above cut off production

  • Agri inputs segment put up a good show, growing by nearly 20% during the quarter on a consolidated basis. The company has made non-subsidy farm business and the consumer business as its growth platforms and this thrust will continue in the future as well

    Consolidated segmental break up...
    Segment 4QFY13 4QFY14 Change FY13 FY14 Change
    Inorganic Chemicals
    Revenues 18,330 21,194 15.6% 74,991 81,676 8.9%
    PBIT (1,615) (8,022) 396.7% 7,881 (212)  
    PBIT margin -8.8% -37.9%   10.5% -0.3%  
    Fertilisers
    Revenues 11,904 11,560 -2.9% 54,366 55,081 1.3%
    PBIT 522 (873)   3,618 2,303 -36.3%
    PBIT margin 4.4% -7.6%   6.7% 4.2%  
    Other agri inputs
    Revenues 3,012 3,604 19.7% 16,799 20,235 20.5%
    PBIT 170 283 66.2% 2,002 2,491 24.4%
    PBIT margin 5.7% 7.9%   11.9% 12.3%  
    Others
    Revenues 194 499 157.2% 891 1,745 95.8%
    PBIT (130) (364) 178.9% (479) (780) 62.8%
    PBIT margin -67.3% -72.9%   -53.8% -44.7%  

  • Consolidated operating profits fell by 32% YoY during the quarter as barring employee costs and power and fuel expenses, all the other cost heads grew at a faster rate than the sales.

  • PBT of the company came in lower by 66% YoY as besides lower operating profits, interest costs and lower other income also impacted profits negatively.

  • At the bottomline level, profitability fell further with the company's bottomline going into the red and suffering a loss to the tune of Rs 12.3 bn. Significantly higher extraordinary losses, due mainly to one-time restructuring charge of Rs 9.2 bn, most of which attributed to goodwill, at its Kenyan operations were mainly responsible for the same.
What to expect?

At the current price of Rs 321, the stock trades at an EV/EBIT multiple of around 8.5 times its standalone FY15 expected EBIT. The expected stability of the inorganic chemicals business augurs well for the medium term outlook of the company. This, combined with the robustness of the agri business and the continued stability of the fertilisers business enables us to maintain our BUY on the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities, please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 4-5% of your portfolio.

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