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Tata Chemicals: Going strong - Views on News from Equitymaster
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  • Oct 29, 2003

    Tata Chemicals: Going strong

    Tata Chemicals (TCL) announced its 2QFY04 results yesterday. Buoyed by a revival in fertilizer demand and improved financial management, the company has reported a 16% growth in topline and an impressive 71% rise in bottomline. For 1HFY04, TCL has registered a 6% rise in net sales and a 59% growth in net profit. In this context, let us briefly evaluate the company’s performance.

    Results at a glance…
    (Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
    Net Sales 4,175 4,830 15.7% 7,441 7,909 6.3%
    Other Income 99 279 180.7% 303 422 39.3%
    Expenditure 2,922 3,444 17.8% 5,230 5,406 3.4%
    Operating Profit (EBDIT) 1,253 1,386 10.6% 2,212 2,503 13.2%
    Operating Profit Margin (%) 30.0% 28.7%   29.7% 31.6%  
    Interest 248 114 -54.0% 507 250 -50.7%
    Depreciation 339 334 -1.6% 679 668 -1.6%
    Profit before Tax 765 1217 59.1% 1,329 2,007 51.0%
    Extraordinary income (expense) (35) (38)   (70) (113)  
    Tax 259 374 44.2% 449 604 34.5%
    Profit after Tax/(Loss) 470 805 71.2% 810 1,291 59.2%
    Net profit margin (%) 11.3% 16.7%   10.9% 16.3%  
    No. of Shares (m) 180.7 180.7   180.7 180.7  
    Earnings per share (Rs)* 10.4 17.8   9.0 14.3  
    P/E (x)   6.6     8.3  

    TCL’s topline growth during 2QFY04 was fuelled by a 29% growth in the fertilizer division. Good monsoons have resulted in an increase in the fertilizer demand. As the fertilizer sales volumes increased 14%, it is apparent that TCL has been able to get higher realizations during the period. The company’s Babrala plant continues to be the most efficient plant in the country. TCL is hence expected to benefit from the group concession scheme of urea pricing as it is expected to reward efficient manufacturers.

    In the inorganic chemicals division, soda ash volumes increased 3%. The total glass-manufacturing customers (key consumer industry of soda ash) increased 18% during the quarter. On the exports front, TCL continued with its strong performance selling 36,000 MT of soda ash. On the domestic front, the company has retained its leadership position with a market share of 34% in this segment. In the salt segment, ‘Tata Salt’ continues to be the market leader with a 38% share. ‘Samundar’ crystal salt is also seeing a steady increase in demand.

    On the operations front, an increase in the raw material, power and fuel cost have put pressure on the operating profit margins. However, drop in operating profit margin was offset by a sharp increase in other income and a drop in interest cost. Consequently, TCL saw a 540 basis point increase in net margins. The other income growth was due to the company receiving interest on tax refund. However, the biggest positive for TCL was the drop in the interest costs. The financial management initiatives undertaken by the company have resulted in a 33% reduction in debt to Rs 6.2 bn. TCL’s debt to equity ratio now stands at 0.36.

    Going forward, TCL is planning to enhance its fertilizer capacity. The company is also considering inorganic growth opportunities for increasing its fertilizer capacity. We believe that in view of the good monsoons and a consequent rise in urea demand and the implementation of the long-term fertilizer policy, TCL is likely to be a major beneficiary. In the soda ash business, TCL is planning to focus on international markets and also enhance existing relations with key customers. As for the salt business, TCL plans to expand this segment by introducing variants.

    The scheme of amalgamation of TCL with Hind Lever Chemicals received shareholders approval on 25th July ’03 and was subsequently approved by The Mumbai High Court. However, the amalgamation will come into effect only after The Punjab and Haryana High Court approves the same. The merger is expected to result in an increase in market share for the company.

    At Rs 113, TCL is trading at a P/E of 8x annualised 1HFY04 earnings. While there exist tremendous growth potential in the fertilizer segment in the long run, the company continues to face intense competition in the soda ash segment. The financial management initiatives undertaken by the company are expected to ensure good bottomline growth going forward. However, we would like to caution the investors that urea (fertilizer segment) continues to depend upon the vagaries of monsoon and government regulations.



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