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Tata Chem: OPM's improve

Oct 30, 2001

Tata Chemicals has registered a 29% growth in net profit for 1HFY02 on the back of 400 basis points rise in operating margins. Sales however, dropped around 17% mainly on account of fire at its Mithapur due to which the factory remained closed for a couple of weeks. The company has merged its investment subsidiary Sabras Investment and Trading co. in the current year and hence the results are not strictly comparable.The company also recorded a considerable reduction in interest cost as it repaid part of its high cost debt funds.

(Rs m)2QFY012QFY02% change1HFY011HFY02% change
Sales 4,557 3,678 -19.3% 7,809 6,592 -15.6%
Other Income 177 166 -6.4% 227 203 -10.6%
Expenditure 3,418 2,626 -23.2% 5,921 4,730 -20.1%
Operating Profit (EBDIT) 1,139 1,052 -7.6% 1,888 1,862 -1.4%
Operating Profit Margin (%)25.0%28.6% 24.2%28.2%
Interest 404 309 -23.5% 874 623 -28.8%
Depreciation 336 330 -1.7% 670 659 -1.7%
Profit before Tax 576 579 0.4% 571 783 37.2%
Provision and Contigencies 32 36 32 36
Extraordinary Income - (32) (36)
Tax 70 109 55.4% 70 146 108.4%
Profit after Tax/(Loss) 474 434 -8.5% 437 566 29.6%
Net profit margin (%)10.4%11.8% 5.6%8.6%
No. of Shares (eoy) (m)180.7180.7180.7180.7
Diluted Earnings per share*
P/E (at current price) 4.1 6.2

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 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.

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.

Though, the company is attempting to become one of the lowest cost producers of soda ash globally, the fact remains the company's financials remain prone to commodity cycles. At the current market price of Rs 39, the stock trades at 5.5x 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%. The company has recently announced its intention to buyback 15% of its equity through open market purchases.

Read our recent update on Tata Chemicals

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