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Tata Chem: Well played! - Views on News from Equitymaster
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  • Nov 23, 2004

    Tata Chem: Well played!

    Performance Summary
    Tata Chemicals, the chemicals and fertiliser major, announced its 2QFY05 numbers last month. While the company's performance at the topline level was poor, net profit rose sharply even after adjusting for extraordinary adjustments in light of lower interest costs. Significant rise in input cost has subdued net profit growth during the fiscal.

    (Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
    Net sales 8,095 7,290 -9.9% 12,241 12,494 2.1%
    Expenditure 6,681 5,886 -11.9% 9,594 9,977 4.0%
    Operating profit (EBDITA) 1,414 1,404 -0.7% 2,647 2,518 -4.9%
    EBDITA margin (%) 17.5% 19.3%   21.6% 20.1%  
    Other income 184 267 45.1% 268 299 11.3%
    Interest (net) 243 64 -73.5% 467 137 -70.8%
    Depreciation 359 341 -5.1% 718 685 -4.6%
    Profit before tax 995 1,266 27.2% 1,730 1,995 15.3%
    Extraordinary income/(expense) (38) (5) - (113) (10) -
    Tax 383 399 4.2% 614 667 8.6%
    Profit after tax/(loss) 575 862 49.9% 1,003 1,318 31.4%
    Net profit margin (%) 7.1% 11.8%   8.2% 10.5%  
    No. of shares (m) 215.2 215.2   215.2 215.2  
    Diluted earnings per share (Rs)* 10.7 16.0   9.3 12.2  
    Price to earnings ratio (x)         12.1  
    (* annualised)            

    What is the company's business?
    Tata Chemicals is the market leader in soda ash with an estimated market share of 32%. It is also one of the most cost efficient producers of fertilisers in the country. Besides fertilisers, the company has presence in foods additive segment (basically branded salt) with a 42% share. The fertiliser segment of the company also includes phosphates (apart from urea). The Indian fertiliser sector is highly regulated in terms of prices, distribution and subsidies.

    What has driven performance in 2QFY05?
    Mixed show by segments: While inorganic chemical segment of the company has posted a 7% rise in revenues in 2QFY04, fertiliser segment has witnessed a 18% decline in the same period. As per the company, the domestic soda ash demand has grown by 4%. Riding on the back of this, the capacity utilisation level has improved to 87% in 2QFY05. Despite a 10% YoY growth in urea sales volumes in 2QFY05, the decline in overall fertiliser revenues is on account of fall in DAP sales during the quarter. The company has attributed the same to unavailability of raw materials. The company has already got contracts for supply of these raw materials and is planning to enter into more such long- term contracts to secure the supply of raw materials.

    Segmental break-upů
    (Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
    Inorganic chemicals - revenues 2,456 2,638 7.4% 4,957 5,185 4.6%
    PBIT margin 19.9% 20.1%   24.6% 21.3%  
    Fertilisers - revenues 5,689 4,652 -18.2% 7,382 7,309 -1.0%
    PBIT margin 12.9% 13.2%   12.5% 12.8%  
    Total PBIT margins 15.0% 15.7%   17.4% 16.3%  

    Input cost rise absorbed: Key raw material prices like coke, ammonia and fuel (naphtha) have risen very sharply in the last one year in the global markets. In fact, ammonia and coke prices have doubled over the last 18 months. Besides, owing to unavailability of adequate natural gas, the naphtha and LNG usage has increased in the recent past, in line with other fertiliser companies. (35% of fuel-mix in 2QFY05 for manufacturing urea). Despite this, the company has managed to improve EBIT margins of both the segments on the back of price increases for DAP and better capacity utilisation.

    Other income boost: The sharp rise in other income in 2QFY05 is on account of profit on sale of shares of Tata Telecom and gains from the sale of mutual funds to the tune of Rs 270 m. Also, interest charges are also significantly lower, as the company has utilised its strong cash flows to retire debt (barring few short-term credits, the company is almost debt-free now). Excluding extraordinary expenses incurred towards VRS, net profit in 2QFY05 has actually increased at a slower rate of 42%.

    What to expect?
    The stock currently trades at Rs 148 implying a price to earnings multiple of 12.1 times annualised 1HFY05 earnings. With urea demand expected to outpace supply at the utilisation level of 100% next year, we expect that the cap on the utilisation is likely to be relaxed for cost efficient players like Tata Chemicals. This will provide a strong growth push in the medium-term. In the long-term, the company has evinced interest in setting up a fertiliser plant in Bangladesh. But this is a long shot. Overall, the company is well placed to capitalise on the long-term growth opportunity in the fertiliser segment.



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