Friday, June 1, 2012

>TATA CHEMICALS: Near term headwinds are adequately priced in, Upgrade to ‘Buy’

Tata Chemicals reported Q4FY12 results. Topline and EBIDTA numbers were in line with estimates. Sales at `34650 mn was up by 30%, while EBIDTA went up by 11% YoY. EBIDTA margin improved to 15.9% from last quarter’s low of 14.6%. Exceptional items include notional forex loss of `246.9 million, impairment of assets at `259.3 million.

■ One-off in Fertiliser segment hits profitability, Bio-fuels assets written down during FY12
TCL has taken `340 mn write down on its Bio-fuels assets (part of Exceptional items reporting under head – Impairment of Assets) and has existed first generation bio-fuels segment. `150 mn of this was taken in Q3FY12 and `190 mn was booked in Q4FY12. In Fertiliser segment, during Q4FY12, `230 mn losses were one-off items which reduced profitability. Out of this, `190 mn loss was booked during Q4FY12 on account of old Ammonia converter, while `40 mn loss was booked for Power.

 Focus on low capex, higher revenue generating businesses (except Urea)
Management indicated its focus on businesses where capex requirement is low for generating incremental revenues except for Urea plants at Babrala and Gabon. TCL has received environmental clearances for Babrala brownfield expansion and will go ahead with project only after Urea Investment Policy is in place post CCEA approval.

■ Challenges in fertiliser sector continue
There is pressure on phosphatic and potassic fertilizers due to INR depreciation and subsidy reduction under NBS policy for FY13 compared to FY12. Phosphoric acid negotiations went through a rough weather with OCP not agreeing to contract at lower rates while other suppliers such as Phoschem, Foskot and ICS with Indian industry (not TCL) agreeing at $840 – 850 levels. OCP has finally agreed to $885 per tonne after ½ of the quarter was over. During Q1FY13, IMACID would be operational for only about ½ of the quarter while DAP/NPK plant at Haldia will operational only for 15 days as it will start receiving acid from Mid-June. Urea quantities linked to IPP may be lower in FY13 compared to FY12 Ammonia plant was shut from 30th march to 1st May for replacement of converter. This will lead to urea volumes being lower than FY12 levels. In FY12, TCL achieved volumes of 1.14 mn while we are building in 1.12 mn for FY13. In a normal year, TCL has potential to achieve production of 1.25 mn tonnes.

■ Price target maintained at `390, Upgrade to ‘Buy’
We like TCL for its initiatives to ensure raw material availability at lower cost through backward integration. In long run, these will prove to be sustainable structural advantages vis-à-vis its peers. Near term remains challenging with several headwinds. At cmp of `317, TCL is trading at P/E of 8.9x and 8.0x for FY13E and FY14E EPS. We maintain target price at `390 based on 11x on FY13E. We believe that near term concerns are adequately priced in and upgrade TCL from ‘Hold’ to ‘Buy’ after correction of over 12% in last 3 months in stock price.