>TATA CHEMICALS LIMITED (MERRILL LYNCH)

■ Earnings decline as expected; Reiterate Underperform
Tata Chemicals Q2 revenue and recurring PAT declined over 50% yoy led by poor performance in soda ash and non-urea fertilizers. Post this we change estimates marginally and reiterate Underperform with PO of INR180. Our PO is pegged at 7.6x FY11E P/E- a 10% discount to the 8yr avg, which is justified given weak demand in non-urea fertilizers & pressured pricing scenario in soda ash.

■ Soda ash volumes improve sequentially but at lower prices
GCIP volumes were up 23% qoq but at lower prices especially in export markets. This was led by ANSAC’s focus on regaining market share from Chinese exporters. Industry reports suggest that Chinese exporters continued to sell at or below their delivered costs in Sep qtr. We believe this will keep prices in check near term and pressure margins in soda ash though at higher capacity utilization.

Not yet out of woods

■ Mixed performance in fertilizers to continue
Urea volumes were up 9% yoy but NPK fertilizer volumes declined 49% led by weak monsoon. IMACID continued to report losses for the fourth sequential quarter. While we expect IMACID performance to improve in H2FY10, muted sales in NPK will likely continue as a follow up of weak monsoons. The company mentioned that it is considering doubling its urea capacity through brown field expansion.

■ Risk reward unfavorable
While we expect earnings to decline 28% in FY10, the stock trades at 11x FY11e PE and 7.1x FY11E EV/EBITDA. We rate risk-reward unfavorable given i) pressured price outlook in soda ash, ii) expectation of continuing softness in non-urea fertilizers and iii) increasing pension liabilities. Reiterate Underperform.

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