Tata Chemicals a market outperformer: HDFC Sec

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Tata Chemicals a market outperformer: HDFC Sec

HDFC Securities is bullish on Tata Chemicals and has maintained a market out performer rating on the stock.

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HDFC Securities is bullish on Tata Chemicals and has maintained a market out performer rating on the stock.

HDFC Securities research report on Tata Chemicals

• TCL's Q1FY08 revenues at Rs 6690 Million, down 12% (y/y) were impacted by planned annual maintenance shutdown and power outages. Despite a production cut, strong demand for chemicals helped improve realizations and thus operating margins by 560 bps to 24.4%. Besides healthy realizations, efficient operation (lower power costs, trading, input and other overheads) too has contributed to the margin expansion.
• Further, forex gains of Rs 380 Million and the doubling of other income, helped net margins expand by a whopping 816 bps to 18.1%. The net profit grew by 61% to Rs1212 Million.

Outlook and Valuation

We believe TCL is on a strong footing across all its businesses over the next 3 years. At 0.16x PEG, 4.9x FY08E EV/EBITDA & 1.8x P/BV, the stock reflects pessimism. With increasing share of non-fertiliser portfolio, benchmarking efficiencies and attractive dividend yield of 3%, TCL offers deep value. We maintain "Outperformer" rating on the stock.

Key developments

TCL has commenced the de-bottlenecking of Babrala fertiliser facility, which would increase its capacity to 1.2 mmt from 0.86 mmt at present.  Over the next two years, TCL also plans to de-bottleneck and modernize its Mithapur chemicals facility that would increase soda ash capacity to 1.2 mmt from 0.9 mmt at present. 

Led by strong demand and lesser exports by China, the spot prices of soda ash are hovering around USD230 approx 240/mt against USD 180 approx 200/mt in the last few quarters. This trend is expected to continue until March '08. TCL will also get additional soda ash volumes from its expanded facility in Magadi, Kenya from H2 FY08.