>Tata Chemicals (EMKAY)

Poor visibility on soda ash business
Tata Chemicals (TCL) management shared cautious outlook on their soda ash business in near future in our recent meeting with company’s key management. Management maintained their view of 10-15% drop in soda ash sales volumes due to recent economic slowdown. However future outlook on global soda ash prices remains wobbly since possibility of price cut by the Chinese players to gain volumes cannot be ruled out. We have factored ~10% drop in sales volume and ~8% decline in prices while any steep cut in global soda ash prices may lead to downgrade in our earnings estimates. Also considering the recent sharp rally of ~50% in TCL’s stock price without any significant improvement in near term visibility in business, we maintain our price target of Rs 140 and maintain our reduce rating on the stock.

Soda ash volumes may decline by ~15% however outlook on prices remain shaky
Company has earlier in its Q3FY09 conference call indicated that its soda ash sales volumes (domestic as well as global) may decline by 10-15% and maintained its view. Soda ash prices are strong in CY09 since new contracts for CY09 have happened at average ~ US$ 20 / mt (~15%) higher than CY08. However soda ash demand in China is down by 20- 25% and operating ratio is down to 75-80%. Low capacity utilization of Chinese plants may trigger price cuts to gain volumes through rise in exports and as a result globally soda ash prices may come under pressure. We highlight that cash cost of Chinese manufacturers (US$ 170-180 / mt) is still 25-30% lower than the current soda ash prices (US$ 230-250 / mt). As a result outlook on medium term soda ash prices remains shaky.

Fertiliser business to improve, while Q4FY09 performance to remain weak
Company’s Haldia plant (phosphatic fertiliser) operations were affected during Dec 08-Feb 09 period due to unfavourable DAP prices and phosphoric acid prices. However production resumed recently after the phosphoric acid prices have come down to make production of DAP viable. Operation at its subsidiary, IMACID was also affected during the same period and has resumed now. Company is also expected to benefit from the completion of debottlenecking at its urea plant. After getting gas from RIL KG basin, company will be able to meet its entire gas requirement for urea production and will benefit from imported parity price (IPP) linked subsidy on additional production of ~15%. In our FY10 estimates, ~ 5% profit is contributed to this incremental production.

Stock has rallied ~50% recently, while visibility remains poor, we maintain reduce rating
TCL’s share price has recently rallied by 50%+ from its lows of Rs 100 and outperformed market by ~30% (sensex midcap index). However medium term visibility on earnings\ remains weak, since there has been no change in business fundamentals. Erosion in global soda ash prices can not be ruled out in near future. We expect company to report an EPS of Rs 24.7 in FY10 (lower than consensus) however possibility of earnings downward cannot be ruled out if price correction happens in soda ash. We have price target of Rs 140 and maintain our Reduce rating on the stock.

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