Tata Chemicals: Something special

Oct 19, 2016

TATACHEM

Buy with A target of 610 over 4-8 weeks and with a stoploss of 525. do consult your advisors before taking trade.

Sale of the urea business has helped de-risk the company from policy uncertainties

Investors with a two to three year perspective can consider buying Tata Chemicals. The sale of the urea business in August indicates that the management wishes to reduce dependence on commoditised businesses where the pricing power is low while growing the share of value-added products such as speciality chemicals.

The sale of urea business also helps remove the uncertainty regarding government policy changes and gas availability, and its balance sheet position improves with reduction in debt. Also, better monsoon after a lull of two years is expected to improve rural demand for its fertiliser, pesticides and seeds businesses.

At a price of ₹547, the stock quotes at a price to earnings multiple of 17.9, mid-way between its 5-year PE band.


Market leadership
Tata Chemicals is the world’s second largest producer of soda ash — with footprints in the US, Africa, the UK and India, through its subsidiaries. Asia is its biggest market (72 per cent revenue share), while America and Europe constitute another 14 and 9 per cent respectively.

De-leveraging

TCL’s sales were up 3 per cent to ₹17,708 crore in FY-16 and down 8.5 per cent during the first quarter of 2016-17. Its profit after tax was up 31 per cent to ₹780 crore in FY-16, thanks to lower input prices.

During the first quarter of 2016-17 too, PAT was up by 32 per cent to ₹280 crore compared to the previous year.

Revenue in the coming quarters is expected to fall, once the urea business is excluded. But the company’s profitability will improve with this sale. While the EBIDTA margin of the fertiliser business was 3.4 per cent in FY-16, operating margin for the company as a whole was 12 per cent.

The company debt-to-equity ratio was 1.5 as of March 2016 as against 1.4 the previous year. As of March 2016, the company’s total borrowings were ₹8,378 crore, out of which 15 per cent were borrowings caused by delayed subsidy payment. The cash generated by the sale of the urea business can help bring down the borrowing.

Article source; Hindu Business line published on September 24, 2016