Friday, February 17, 2012

>TATA CHEMICALS: Better‐than‐expected qtr, cautious in the near term

 Higher trading sales led to better‐than‐expected Q3FY12 sales: Tata Chemical’s (TCL’s) net sales grew by 31.9% YoY to Rs38.1bn (PLe: Rs30.6bn), primarily led by higher trading sales and better realization in both the businesses (i.e. inorganic chemical and fertilizers). Overall soda ash volume was lower by 7.6% YoY to10.2Lac MT (down 10.4% QoQ), primarily on account of the shutdown of its GCIP (US) plant for ~30 days due to expansion in its soda ash capacity. Further, BMGL’s sales volume has impacted on account of a delay in the onset of winter. We believe that the company has done higher trading sales that resulted in better-than-expected sales (Purchase of traded product has gone up by 2.3x YoY). Inorganic chemical’s sales grew by 26.6% YoY to Rs16.7bn, primarily on account of better realization across the geographies and it has been supported by a favourable currency movement. Fertilizer sales grew by 40.4% YoY to Rs17.3bn on account of higher trading sales and manufactured non-urea sales volume (non-urea sales volume up 36.6% YoY). Further, it has been pushed up by higher farm-gate prices and subsidy of non-urea fertilizers.

■ Lower tax resulted in better‐than‐expected PAT: TCL’s EBITDA grew by 18.5% YoY to Rs5.2bn (PLe: Rs5.4bn). EBITDA margin was lower by 160bps YoY to 13.7% (down 520bps QoQ), primarily on account of higher input cost which has been partially mitigated by higher realization and efficient operations. EBIT margin of inorganic chemicals and fertilizer stood at 15.7% and 9.7%, respectively. Company has provided tax at lower rate i.e. 20.6% (Q3FY11: 29.8%, Q2FY12: 27.2%, PLe: 33.0%). PAT grew by 53.2% YoY to Rs2.2bn (PLe: Rs1.7bn). Company has taken forex loss reversal for the earlier period during the quarter for Rs328.4m (considered as an exceptional item).

■ Key Highlights for the quarter: During Q3FY12, company has completed 1Lac MT expansion of natural soda ash facility in GCIP as well as de-bottlenecking of SSP facility in India by 0.5Lac MT. Company is witnessing early signs of contraction in soda ash demand at present. Company expects that delay in onset of winter in UK during January could impact salt sales in the coming quarter. Company has suspended its operation in Khet se program due to longer time to breakeven the business. Company indicated that soda ash demand in the domestic business is healthy. In the US market, soda ash demand is robust. Company believes that Chinese market is slowing down and it could affect the global soda ash market in the medium term. Company has taken price hike of Rs500-600/MT in soda ash in India during Q3FY12. Further, company has taken ~US$15/MT price hike in rest of the geographies since January 01, 2012. Management guided that global fertilizer prices are coming off and it could lead to challenges in the domestic market, going forward.

 Maintain ‘Accumulate’: Post several weak quarters, TCL has reported strong performance during Q2FY12 and Q3FY12. In-line with our expectation, management is witnessing early signs of soda ash demand contraction. We are cautious and believe that Soda Ash business could face a challenge on account of rising input costs and slow down in Europe/US, primarily in Auto/Infrastructure sector, going forward. At present, stock is trading at stock is trading at one-year forward P/E of ~10x v/s 5year band of 7x-11x. We maintain our ‘Accumulate’ rating on the stock, with the target price of Rs387. (i.e. 11xFY13E EPS).