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Tata Chem: Fairly valued?

Jul 31, 2002

The results posted by Tata Chemicals for 1QFY03 need to be read carefully. The company has reported a 158% rise in profitbality. However, the same is largely on account of lower base last year. In the first quarter of last year, there was a considerable drop in sales and profitability on account of fire at it's Mithapur factory.

(Rs m) 1QFY02 1QFY03 % change
Sales 2,914 3,622 24.3%
Other Income 38 77 104.3%
Expenditure 2,104 2,536 20.5%
Operating Profit (EBDIT) 810 1,087 34.2%
Operating Profit Margin (%) 27.8% 30.0%  
Interest 314 259 -17.4%
Depreciation 329 340 3.3%
Profit before Tax 205 565 175.6%
Provision and Contigencies      
Extraordinary Income (36) (35) -2.2%
Tax 37 189 410.5%
Profit after Tax/(Loss) 132 340 157.8%
Net profit margin (%) 4.5% 9.4%  
No. of Shares (eoy) (m) 180.7 180.7  
Diluted Earnings per share* 2.9 7.5  
P/E (at current price)   8.0  

However, what is encouraging is that the company seems to be on target in its efforts to improve operating performance. It has consistently improved its operating margins in the last three quarters on the back of restructuring and cost cutting excerise. The company seems to be moving fast to become the lowest cost producer of synthetic soda ash globally. The internal initiatives have been coupled with encouraging soda-ash prices thus contributing to robust financial performance. There has been renewed export focus by the company in the soda ash business.

In the salt business, there has been a 43% rise in volumes with steady progress in initiatives aimed at improving profitability and expanding business. The export market of vacuum salt is lucrative with international salt prices ranging up to US$ 1/kg as compared to US$ 0.2/kg in the domestic market. As part of its strategy, the company has also introduced a new brand in the lower end of the price spectrum. Tata Salt has been a pioneer in the branded edible salt segment with highest market share. However, HLL’s ‘Annapurna’ brand and some new brands like ‘Dandi’ are keeping the company on its toes. After a short slip in market share, the company has regained its market share in the branded salt business.

In the absence of major expansion plans, the company has robust cash flows every year. Apart from this the company also has Rs 4.3 bn in investments (which is equal to 42% of the company’s current market capitalization). Most of these investments are either liquid or invested in Tata group companies, which could unlock considerable value going forward.

However, with this substantial amount of money blocked in investments, the company’s RoCE is impacted considerably. The RoCE of the company has dropped from almost 15% in 97-98 to mere 7% (approximately) for FY02. To counter this situation, the company has initiated a major buyback program. Tata Chemicals has allotted Rs 1.3 bn for its buyback program, which would be through the open market route at a maximum price of Rs 60 per share.

Pending the buyback program of the company, the stock price of Tata Chemicals stock price has remained volatile in the last few days. At the current market price of Rs 60, the stock is trading at 8x its 1QFY03 annualised earnings. The stock looks fairly priced at current valuations. Even our DCF calculations (with 17% discount rate and 0.5% terminal growth rate) suggest that there is not much appreciation in the stock from the current market price.

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