Tata Chemical

Tata Chemicals (TATCHE)
Sept 24, 2007 | Chemicals
COMPANY UPDATE √
WHAT’S CHANGED…
PRICE TARGET…………………………………………………………… Unchanged
EPS (FY08E)………………..………………………………………..…… Rs 29.78
EPS (FY09E)………………..………………………………………..…… Rs 33.98
EPS (FY10E)…………………..………………………………………...... Rs 38.57
The acquisition of Brunner Mond in Aug 2006 propelled Tata Chemicals (TCL) into the league of global soda ash
majors. The Brunner Mond Group has manufacturing facilities in the UK, the Netherlands and Kenya. The capacity
of the Magadi plant in Kenya has been doubled from 3.5 lakh tonnes to 7 lakh tonnes. We expect the expanded
capacity to operate at 38% utilization levels in FY08E and attain full utilization from next year onwards. We expect
higher EBIDTA margins from the Magadi plant as it produces soda ash via natural process. Capacities of the
company's Indian plants are also improving on account of de-bottlenecking initiatives. We expect traction in
capacity utilization and benefits of de-bottlenecking to start kicking in FY09E onwards and are revising our EPS
estimates for FY08E upwards by 8% to Rs 29.78. We estimate TCL’s FY09 EPS at Rs 33.98 and FY10 EPS at Rs
38.57.
Q1FY08 results improves visibility
TCL reported a 55% growth in consolidated net profit to Rs 137.38 crore, despite a 6% decline in consolidated net
sales during the quarter ended June 30, 2007 (Q1FY08). Consolidated net sales declined due to the following
reasons: (i) a 15-day maintenance shut down at its urea and soda ash plants, (ii) lower steam availability at soda ash
plant; and (iii) a y-o-y decline in phosphatic fertilizer sales volumes. With firm prices of soda ash and higher
proportion of urea sales, TCL achieved a consolidated operating margin expansion of 400 bps to 22% from 18%
Q1FY07. We believe the removal of export benefits in China would keep soda ash prices on firm footing. Revenues
from fertilizers declined 17% y-o-y due to a fall in volumes, which we expect to recover in the coming quarters. Urea
sales volumes declined marginally 2%, while that of phosphatic fertilizers declined 44%. Operating margins for
fertilizers expanded 325 bps due to a fall in the proportion of low-margin phosphatic fertilizers.
Valuation
We believe all the businesses are in full throttle. Soda ash prices and realizations are likely to remain robust on the
back of improved demand from both detergent and glass segments. The company’s performance is in line with our
expectations and we believe the new capacity at Magadi plant would contribute to the top and bottomline along
with margin expansion. We are revising our FY08 EPS estimates upwards by 8% to Rs 29.78. We expect EPS to
grow at a CAGR of 18% over FY07-10E to Rs 38.57. We reiterate our outperformer rating on the stock and value at
Rs 374 on sum-of-the-parts basis, which discounts our target price at 11x FY09E EPS and 9.70x FY10E EPS.
ICICIdirect | Equity Research
Key Financials (Rs crore)
Year ending March 31 FY07 FY08E FY09E FY10E
Sales 5,924.00 6,361.43 7,309.31 7,807.46
Operating profit 1,118.23 1,098.14 1,326.33 1,414.59
Standalone net profit 444.21 467.27 573.75 647.40
Brunner Mond net profit 63.83 173.45 157.40 182.39
Consolidated net profit 508.04 640.72 731.15 829.79
Equity capital 215.16 215.16 215.16 215.16
Consolidated EPS (Rs) 23.61 29.78 33.98 38.57
Source: ICICIdirect Research
Time frame 12 months
OUTPERFORMER
Raghvendra Kumar
raghvendra.kumar@icicidirect.com
PoteTntimiael ufprasmidee 1123 %
Potential upside 13%
Time frame 12
Current price
Rs 276
Target price
Rs 374
Potential upside
36%
Time Frame
12 months
2 | P a g e
RATING RATIONALE
ICICIDirect endeavours to provide objective opinions and recommendations. ICICIdirect assigns ratings to its
stocks according to their notional target price vs current market price and then categorises them as
Outperformer, Performer, Hold, and Underperformer. The performance horizon is 2 years unless specified and
the notional target price is defined as the analysts' valuation for a stock.
Outperformer: 20% or more;
Performer: Between 10% and 20%;
Hold: +10% return;
Underperformer: -10% or more.