The results posted by Tata Chemicals for 1QFY02 need to be read carefully. The company has recorded a profit of Rs 132 m as against a loss of Rs 32 m in last quarter. This is inspite of the fact that sales has recorded a negative growth of 10%. However, operating profits increased by 480 basis points.
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The drop in sales was on account of fire at it's Mithapur factory due to which the factory had to be closed for a couple of weeks time. There was a substaintial reduction in interest cost which contributed to a healthy growth in bottomline. The results of the company are not strictly comparable as it includes income from its erstwhile subsidiary Sabras Investments which was merged with the company late last year. The extraordinary charge is on account of VRS expenses.
The spurt in operating margins was mainly due to recovery in soda ash prices from September last year. Chinese dumping resulted in soda ash prices to touching rock bottom levels before the government levied an anti-dumping duty. Soda ash prices have firmed up since then. Besides, the company is undertaking a massive cost reduction excerise. Soda ash contributes around one third of the company's revenues. The bottomline of the company could see a healthy spurt in coming quarters if soda ash prices remain firm.
While the urea business of the company remained sluggish, the company maintained its leadership position in the branded salt business with a market share of 37% inspite of stiff competition from HLL. Tata Chemicals is considering entering the lucrative export market for branded salt, particularly in the Middle East. The company is exiting from both its non core business viz, detergents and cement. The company has already signed an understanding with Jyothi Labs for sale of its detergents business. The company is also aggresively eyeing opportunities for inorganic growth.
Mr. Ratan Tata, the chairman of the company, hinted at the AGM today, that the company might consider buyback of its shares. While the market capitalisation of the company is around Rs 6.5 bn, the company has liquid investments in its book worth Rs 4.5 bn. Further, the company is expected to generate additional cash from sale of its cement and detergent business.
At the current market price of Rs 36, the stock is trading at 5x our expected earnings for FY02 and a market capital to sales ratio of 0.4x. We expect considerable interest cost savings in the current year, as the company is expected to retire its high cost debt (incl.17% debentures). Tata chemicals has paid an average of dividend of Rs 5.5 in last ten years with an average dividend yield in the range of 11-15%. Though the fact remains that the soda ash business remains prone to commodity cycles, the valuations of the company might look up considering the buyback offer contemplated by the management.
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