>Tata Chemicals Ltd. (MERRILL LYNCH)

Company meeting reinforces confidence

■ Meeting with management reinforces confidence, Buy
Post our channel checks and meeting with Tata Chemicals management we believe price correction in the stock is overdone given i) stabilizing prices in soda ash, ii) strong expected free cash flow led by urea and iii) improving scenario in DAP. The stock trades at 0.6xFY10E P/BV, 5xFY10E PE and at ~22% of the replacement value. We reiterate Buy on the stock given attractive valuations.

■ To tie up for gas; De-bottlenecked capacity on stream
Post de-bottlenecking, urea capacity is up 30% and is already functional. The company is in talks with Reliance Industries for gas supply and is likely to get ~US$6/mmbtu delivered cost. Moreover, we expect DAP and IMACID operations to become profitable in Q1 FY10 given strong correction in rock phosphate prices globally.

■ Soda ash prices are stabilizing
As per the company soda ash prices are stabilizing and demand in North America is stable despite slowdown as flat glass demand gets replaced by container glass. The company has also not scaled back price hikes it got in CY08 in UK and Netherlands. Media reports suggest a likely 31% safeguard duty on cheap soda ash imports from China, which we believe will be a positive for Tata Chemicals.

■ Attractive valuations; strong free cash flow generation
Based on the replacement value of INR570 per share, the stock is trading at a discount of 78%. It is at 0.6xFY10E P/BV and 5xFY10E PE. With EBITDA/interest ratio at 6xFY10E and strong free cash flow expected ahead, debt servicing concerns are overdone in our view. We reiterate our Buy rating on the stock with a price objective of INR180.

To see full report: TATA CHEMICALS