Ruchi Agrawal Moneycontrol Research
Tata Chemicals (TCH) reported a disappointing set of numbers for yet another quarter. Operational weakness coupled with one-off expenses ate into the profits; margins also saw a sharp fall.
Key positives
-While revenue grew 10 percent year-on-year (YoY), there was a 4.4 percent sequential decline.
-Magadi (Africa) operations saw a healthy growth in volumes and improved sales realisations. Margins were better lower fixed costs and improved operational efficiencies
-The quarter included a Rs 92 crore inventory gain compared to a inventory loss in Q3FY18
-The management highlighted that insurance claim has been submitted for losses incurred in US due to the power outage, which has not been accounted for in the current quarter and would be included whenever the claim is cleared.
-Consumer business is performing well, gaining market share and the revenues are growing at a fast pace. New product launches are gaining traction and the pulses business is expected to break even in the coming quarter.
Key negatives
-Margins saw a sharp contraction with a 850 basis points YoY contraction in EBITDA margins and 290 basis points dip in net margins with a substantial uptick in raw material costs
-Exceptional item resulted in a sharp decline in the profit growth YoY. The quarter included a Rs 27.5 crore charge for provisions created for UK pension liability, while the same quarter last year included a Rs 59.6 crore actuarial gain on amendment of medical plan.
-Power outage affected production in North America business. While the selling volumes improved, increase in power costs along with reduced overall average selling price led to an impact on the margins.
-Adverse product mix coupled with high energy and production costs impacted the Europe business. One off increase in UK Pension liability also affected margins.
-Domestic operations higher sales volumes however lower volume sand higher power and fuel costs impacted the net performance
-Rallis reported a disappointing quarter with a substantial contraction in profits and margins despite uptick in revenue. Overhang of high input costs ate away the profitability for yet another quarter.
-Metahalix (the seed business) saw a 12 percent YoY contraction in revenue and continued to be unprofitable for another quarter.
Other notes
- Nellore facility for nutrition solutions business is in the investment phase and the development running as per schedule. Most equipment is expected to be installed by the end of Q4 and the facility is expected to start up post that.
- Silica facility is being upgraded to meet the environmental and other safety norms of Tata Group.
- The company has signed two MoUs to source technology and is working on setting up the plant with an initial target of 4GW capacity for the manufacture of lithium ion batteries. The total upcoming demand is estimated around 40GW and TCH aims to capture 25 percent of this in the long run.
Outlook
The management indicated that most contract up for renewal towards Q4 of the current year and they would be planning to pass on the increased costs in the new contracts. Moreover, there has been some cooling off in the prices of key raw material. Given both these, there should be an improvement in margins in FY20.
The stock has corrected 24 percent in the last two months and is close to its 52 week low. It is trading at FY20e PE of 10x. Stabilisation after one-off incidents across geographies would be something to watch out for. A successful deployment of capital in high margin businesses can improve earnings.
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(Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here)
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