• JANUARY 24, 2002

Tata Chem: Read between the lines

Tata Chemicals has registered a 3% growth in sales for 3QFY02. Operating profit has grown at a faster clip of 8% due to improvement in operating margins. Sales for the nine months are however, showing a dip mainly on account of fire at Mithapur due to which the factory remained closed for a couple of weeks. The net profit has recorded a dip due to higher other income in previous year.

(Rs m)3QFY013QFY02% change9m FY019m FY02% change
Sales 3,769 3,879 2.9% 11,615 10,663 -8.2%
Other Income 2,203 54 -97.5% 2,392 257 -89.2%
Expenditure 2,630 2,649 0.7% 8,551 7,574 -11.4%
Operating Profit (EBDIT) 1,139 1,230 8.0% 3,064 3,088 0.8%
Operating Profit Margin (%)30.2%31.7% 26.4%29.0% 
Interest 358 306 -14.4% 1,230 925 -24.8%
Depreciation 334 328 -1.9% 1,005 987 -1.8%
Profit before Tax 2,650 650 -75.5% 3,221 1,434 -55.5%
Provision and Contigencies    - -  
Extraordinary Items (32) (36)  (97) (108) 
Tax 100 154 53.5% 170 299 76.1%
Profit after Tax/(Loss) 2,518 461 -81.7% 2,954 1,027 -65.2%
Net profit margin (%)66.8%11.9% 25.4%9.6% 
No. of Shares (eoy) (m)180.7180.7 180.7180.7 
Diluted Earnings per share*55.710.2 32.77.6 
P/E (at current price) 4.2  5.7 

There was a huge other income component in the third quarter of last year due to profit on sale of investments. This huge one time revenue was mainly on account of sale of its subsidiary's (Sabras Investments') stake in ACC to Gujarat Ambuja. Sabras Investments was subsequently merged with Tata Chemicals last year. Excluding other income component PBT has grown at 33%.

The improvement 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.

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 43, the stock trades at 5.5x our expected earnings for FY02 and a market capital to sales ratio of 0.4x. The expected interest cost savings due to retiring of its high cost debt (including 17% debentures) is evident from the results. Tata chemicals has paid an average dividend of Rs 5.5 in last ten years with an average dividend yield in the range of 11-15%.

The company has reviewed its earlier approval for buyback of its shares. According to the new proposal, the company would seek the open market route to buyback shares at a maximum price of Rs 60 per share. This would be with a condition that the aggregate consideration for the buyback shall not exceed 10% of the company's equity and free reserves.

Considering that the company's current networth is estimated to be around Rs 20 bn, the amount allocated for the buyback would be around Rs 2 bn. Assuming an average price of Rs 45 per share for the buyback, this could translate into a buyback of 45 m shares or 25% of its current outstanding equity shares. The EPS of the company thus, might see a sharp spurt post buyback. Tata Chemicals has adequate funds at its disposal to fund its buyback.

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