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Tata Chemicals: Buoyed by the rupee - Views on News from Equitymaster

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Tata Chemicals: Buoyed by the rupee

Aug 9, 2007

Performance summary
  • Planned annual maintenance shutdowns and power outages lead to a revenue decline of 12% YoY.

  • Operating margins have expanded by 560 basis points as rising rupee helps reduce the cost of raw material imports.

  • Forex related gains further boost the bottomline and help it register an impressive growth of 61% YoY.

  • Consolidated bottomline grows 54% YoY on the back of a 6% YoY decline in revenues.

(Rs m) 1QFY07 1QFY08 Change
Net sales 7,575 6,689 -11.7%
Expenditure 6,151 5,057 -17.8%
Operating profit (EBDITA) 1,424 1,632 14.6%
EBDITA margin (%) 18.8% 24.4%  
Other income 54 121 124.3%
Interest (net) (8) 376  
Depreciation 365 367 0.6%
Profit before tax 1,105 1,761 59.4%
Extraordinary income/(expense) - -  
Tax 351 550 56.5%
Profit after tax/(loss) 754 1,212 60.8%
Net profit margin (%) 9.9% 18.1%  
No. of shares (m) 215.1 215.1  
Diluted earnings per share (Rs)* 14.0 22.5  
Price to earnings ratio (x)**   11.4  
(* annualised, ** on trailing twelve months earnings)

What is the company’s business?
Established in 1939, Tata Chemicals Limited is India's leading manufacturer of inorganic chemicals, fertilisers and food additives. Part of the US$ 22 bn Tata Group, the company owns and operates the largest and the most integrated inorganic chemicals complex in the country at Mithapur, Gujarat. The company's fertiliser complex at Babrala, Uttar Pradesh, is known for its energy efficiency standards. The company's phosphatic fertiliser complex at Haldia in West Bengal is currently the only manufacturing unit for DAP/NPK complexes in West Bengal. In 2006, TCL acquired Brunner Mond group in the UK making it the world's third largest producer of soda ash with manufacturing locations in three continents.

What has driven performance in 1QFY08?
Let us have a look at the segmental performance of the company.

Inorganic chemicals: The company has two major divisions here viz. soda ash and food additives. As far as soda ash is concerned, while realisations were firm, the company faced production constraints as also rising input costs. On the food additives front, the company maintained its leadership position in the domestic edible salt market with a 49% market share. Sales registered a growth of 5% over the same period last year.

Fertilisers: The revenues from this segment were lower by 17% YoY, mainly on account of a planned maintenance shutdown taken during the quarter. On the other hand, higher value NPK fertilisers continued to comprise a greater proportion of phosphatic fertiliser sales and this is likely to be margin accretive in the long run. With the company acquiring a stake in a Morocco based company, the supply related concerns also seem to be alleviated to a great extent. The company has also received permission from the government to commence the first phase of debottlenecking at its Babrala facility.

segmental break up
(Rs m) 1QFY07 1QFY08 % change
Inorganic chemicals      
Revenues 3,729 3,532 -5.3%
PBIT 913 914 0.0%
PBIT margin (%) 24.5% 25.9%  
Fertilisers      
Revenues 3,818 3,157 -17.3%
PBIT 516 529 2.6%
PBIT margin (%) 13.5% 16.8%  

Rupee appreciation helps: Despite lower sales to the tune of 12%, company’s operating margins have expanded 560 basis points. This could be attributed to the sharp rise in rupee vis-ŕ-vis the dollar during the quarter. With imported raw materials accounting for as much as 65%-70% of the total raw material costs of the company, a rise in the rupee has led to lower outgo for Tata Chemicals. This is evident from the 21% and 32% decline in the raw material costs and traded goods purchased respectively during the first quarter on a YoY basis. Further, the other expenses are also lower by 29% YoY, mainly due to forex related losses during the same quarter last year.

cost break up
(Rs m) 1QFY07 1QFY08 Change
Raw materials 2,454 1,941 -20.9%
% sales 32.4% 29.0%  
Traded goods purchased 474 323 -31.9%
% sales 6.3% 4.8%  
Staff cost 342 388 13.5%
% sales 4.5% 5.8%  
Store, spare parts & consumed 429 413 -3.8%
% sales 5.7% 6.2%  
Power and fuel 896 739 -17.5%
% sales 11.8% 11.0%  
Freight and forwarding charges 659 621 -5.8%
% sales 8.7% 9.3%  
Other expenditure 897 633 -29.4%
% sales 11.8% 9.5%  

Rupee appreciation has not just helped the company pare down its raw material costs but it has also helped boost its interest income. As the company has raised debt in the form of an FCCB and since, the same has not been fully converted into shares yet, their marking to market has led to a huge jump in interest income too. Further, with depreciation charges also remaining meek, the bottomline has grown at an impressive 61% YoY.

What to expect?
At the current price of Rs 259, the stock is trading at a price to earnings multiple of 13 times our estimated FY09 standalone earnings. However, this is not a true representative of the company’s intrinsic value as it has a huge investment portfolio and a majority stake in Brunner Mond. We had given a recommendation on the stock April 2007, taking into account these other investments. Barring the forex gains, which we believe will neutralize in the coming quarters, the company’s performance has largely been inline and hence, we stick with our view.

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