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Tata Chemicals: Good start to FY07! - Views on News from Equitymaster
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Tata Chemicals: Good start to FY07!
Jul 27, 2006

Performance summary
Tata Chemicals announced its financial results for the quarter ending June 2006. For the quarter, strong volume growth across its major businesses along with better realisations led to an impressive growth in the topline. However, due to higher raw material costs, on account of higher production of DAP (phosphate) and NPK fertilisers, as well as a decrease in stock-in-trade, margins witnessed some pressure. Due to the lower margins, as also a forex loss, the net profit growth lagged the topline and the operating profit growth.

Financial performance (Standalone): A snapshot
(Rs m) 1QFY06 1QFY07 Change
Net sales 5,100 7,575 48.5%
Expenditure 3,952 5,966 51.0%
Operating profit (EBDITA) 1,148 1,609 40.2%
EBDITA margin (%) 22.5% 21.2%  
Other income 169 (132)  
Interest (net) 19 8 -60.3%
Depreciation 342 365 6.6%
Profit before tax 955 1,105 15.7%
Tax 306 351 14.9%
Profit after tax 649 754 16.0%
Net profit margin (%) 12.7% 9.9%  
No. of shares (m) 215.2 215.2  
Diluted earnings per share (Rs)*   16.9  
Price to earnings ratio (x)*   12.1  
* On a trailing 12-month basis.

What is the company’s business?
Tata Chemicals (TCL) is the leading manufacturer of inorganic chemicals in the country. The company also manufactures fertilisers and food additives. TCL operates the largest and most integrated inorganic chemicals complex in India, at Mithapur in Gujarat. The company is also the leader in the branded, iodised salt segment. It is also amongst the largest producers of synthetic soda ash in the world. TCL recently acquired a UK-based chemicals company, Brunner Mond, which makes it the third-largest soda ash manufacturer globally and also gives it a presence in the low cost natural soda ash segment, apart from increasing its geographic reach.

What has driven performance in 1QFY07?
Its volumes and realizations again: TCL recorded an impressive 48.5% YoY growth in its topline in 1QFY07. This performance was driven mainly by the fertilisers segment. This segment grew at a scorching pace of 74.0% YoY. It accounted for as much as 65.6% of the incremental revenues this quarter. While DAP sales volumes grew at an abnormal 787.5% YoY, while NPK sales volumes grew at a strong 44.4% YoY. This was owing to the fact that production and sales volumes of these fertilisers were lower in 1QFY06 on account of the inconsistent availability of phosphoric acid. This issue has since been addressed, with the acquisition of a 33.3% stake in IMACID SA, a Moroccan company that manufactures phosphoric acid. However, urea sales volumes grew at just around 2.0% YoY. Realisations improved by 4.2% YoY in the urea business, and were at Rs 7,500 a tonne this quarter (Rs 7,200 a tonne in 1QFY06). A part of this was also due to rising input prices.

As regards the chemicals segment, this business grew at a robust pace of 29.3% YoY. Sales volumes of the key soda ash business grew by 21.5% YoY. Dense soda ash comprised 32% of total soda ash sales in 1QFY07. Realisations continue to improve in this business and the company expects soda ash prices to remain firm in the medium term, given favourable demand-supply equation (2 Chinese plants were be relocated due to environmental regulations and there was a delay in setting up of 2 other Chinese plants). The company has effected a price hike of Rs 350 per tonne from June 29, 2006, due to the favourable demand-supply equation, as well as increasing freight costs.

TCL expects soda ash volumes to grow between 5% and 10% YoY in FY07. The company is also undertaking a modernisation programme at Mithapur, which will slightly increase the overall capacity, The Magadi plant in Kenya will have a capacity of 720,000 tonnes by September, up from 370,000 tonnes currently. This will drive future growth at the consolidated level. TCL continues to be the market leader in this segment with a 33.6% market share including imports (29.4% at the end of 1QFY06).

In the Food additives business (Tata Salt), volume sales was 1.8% YoY. TCL continues to remain the market leader in this space, with a 51.6% market share of the national branded segment and 22.6% in the overall iodised salt segment. The cement business, on the other hand, saw sales volumes remaining stagnant on a YoY basis. Operations during 1QFY07 were impacted owing to a kiln breakdown and limited truck availability.

Segmental Revenues
(Rs m) 1QFY06 1QFY07 Change
Inorganic Chemicals      
Revenues 2,906 3,757 29.3%
% of Net Sales 57.0% 49.6%  
PBIT 743 913 22.9%
PBIT margins 25.6% 24.3%  
Fertilizers      
Revenues 2,194 3,818 74.0%
% of Net Sales 43.0% 50.4%  
PBIT 265 516 94.5%
PBIT margins 12.1% 13.5%  
Total      
Total Revenues 5,100 7,575 48.5%
PBIT 1,008 1,429 41.7%
PBIT margins 19.8% 18.9%  

Margins under pressure: During the quarter, TCL’s operating margins witnessed a 127 basis points fall. This was due to higher raw material costs because of increased DAP and NPK production during the quarter. There was also a decrease in stock-in-trade of Rs 251 m. As regards segmental margins, PBIT margins for the Inorganic chemicals business fell by 126 basis points, while those for the fertiliser business increased by a strong 142 basis points. In fact, the PBIT in absolute terms was up by as much as 94.5% YoY in the fertilisers business.

Bottomline growth decent: During 1QFY07, TCL’s bottomline witnessed a reasonable 16.0% YoY growth. However, this was considerably lower than the topline and operating margin growth, due to the lower margins as well as a forex loss of Rs 185 m a (gain of Rs 62.5 m in 1QFY06).

Over the last few quarters…
  2QFY06 3QFY06 4QFY06 1QFY07
Sales growth (%, YoY) 36.7 21.1 4.7 48.5
OPM (%) 18.7 13.6 13.8 21.2
Net Profit growth (%, YoY) 44.4 1.3 (42.0) 16.0
Inorganic Chemicals growth (%, YoY) 26.2 10.7 17.0 29.3
Fertilizers growth (%, YoY) 42.6 25.2 (5.2) 74.0

What to expect?
At the current price of Rs 204, the stock is trading at a price to earnings multiple of 12.1 times trailing 12-month standalone earnings. Going forward, with the tight demand-supply equilibrium globally, the company expects soda ash prices to remain firm, thus hinting at better realisations over the medium term. The Magadi expansion will start to take effect from September this year. The debottlenecking exercise at Mithapur will also increase capacity.

As regards TCL’s fertiliser business, the company has submitted an application for the production of 50,000 MT of neem-coated urea in the current financial year, and approval for the same is awaited. While this is a positive, as neem-coated urea commands better pricing, we remain cautious on the time required to get approval, given that the government generally does things at its own pace. The company expects no growth in urea volumes in FY07, while DAP and NPK fertiliser volumes are expected to show a strong 15% to 20% YoY volume growth, due to assured supply of phosphoric acid with the IMACID joint venture, unlike last year. The government restrictions are, however, the key negative for this business, apart from excessive dependence on the annual monsoons.

Overall, we remain positive on TCL from a long-term perspective, and believe that the benefits from the Brunner Mond acquisition are not yet fully reflected in the current market price.

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