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TATA CHEMICALS

Outperformer - Target Price: 140

KG basin gas to provide stability
Tata Chemicals is expected to sign an agreement to buy natural gas from Reliance Industries for its 1.15 million tonne urea plant in Uttar Pradesh. The Gas Sales and Purchase Agreement (GSPA) is expected to be signed on 6 March 2009 to get Reliance's eastern offshore (Krishna-Godavari) KG-D6 gas. The company is expected to pay US$4.20 per million British thermal unit price plus transportation and taxes which will be an additional of US$1.8 per million British thermal unit. The company has already increased the capacity of its plant from 0.86million tonnes to 1.15 million tonnes through the de-bottlenecking process. According to media reports, the company would increase capacity of urea further at Babrala plant in Uttar Pradesh if it gets assured gas supply for long-term.

The Babrala plant of the company will get 0.88 million cubic meters per day (mmscmd) of gas from KG-D6. After 0.88 mmscmd gas from Reliance, 2.24 mmscmd gas requirement of Babrala plant of Tata Chemicals would be fully met. The Babrala plant currently receives 1.46 mmscmd gas from the state gas utility GAIL India and the Indian Oil Corp (IOC). It produces both urea and ammonia. The Babrala plant of Tata Chemicals is the first in the country to run on dual fuels - naphtha and gas. The Gas Sales and Purchase Agreement (GSPA) with Reliance for supplying natural Gas will hedge the company from volatility of naphtha price and will help the plant to run at higher capacity utilisation.

We believe that supply of KG basin gas will improve the fertiliser production which we have factored in our model. We have assumed that increased capacity will run at 90% capacity utilisation in FY10. Overall, the capacity utilisation of urea plant is expected to be at 129% in FY10. We expect that the positive development would nullify the expected downtrend in soda ash business due to its declining prices (Rs 11,479 per tonne for Tata Chemical standalone which is 12.5% down in FY10 over FY09 and Rs 10,750 per tonne for Brunner Mond which is 12.3% down in FY10 over FY09) and volumes (decline by 5.6% and 3.2% for Tata Chemical standalone and Brunner Mond respectively for FY10 over FY09).

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