Tata Chemicals Ltd.-Revised Report

Background

Promoted in 1939, Tata Chemicals Ltd. (TCL) is engaged in the manufacture of fertilizers and inorganic chemicals. Fertilizer segment comprises Urea, DAP, NPK and MOP and inorganic chemicals segment comprises soda ash, sodium bicarbonate, cement, salt and STPP. Both these segments are in the growth phase.

Investment rationale

·         The Company's competitive advantage stems from its inorganic segment, mainly soda ash business. The domestic demand is expected to grow at a CAGR of 6% led by increase in consumption from glass industry and soap & detergent industry. In world market, China is one of the countries that drive the global soda ash industry. With no significant capacity addition, China would be net importer of soda ash for next 2 years. This leaves enough room for Indian players to capture world demand for soda ash.

·         With a view to capitalize on the growth opportunity in the inorganic segment the Company is expanding its domestic soda ash manufacturing capacity to 1.2 mtpa. Thus the Company's revenue from domestic inorganic business is expected to increase due to better realization from the soda ash business coupled with increase in the capacity.

·         With a view to diversify geographically, the company acquired Brunner Mond Group Ltd (BGML) which is the 5 ^th largest producer of soda ash in the world. With this acquisition the company also got access to low cost natural soda ash through Magadi Soda Ash Company, which is a 100% subsidiary of BGML.

·         TCL is also in the process of de bottlenecking its Urea plant at Babrala. This will enable the Company to pick up further market share in Urea market.

Valuations and Recommendations:

Tata Chemicals Ltd has reported consolidated EPS of Rs.24.51 for FY07. The company's Earnings Per Share (EPS) will increase to Rs. 26.15 and Rs. 34.20 in FY08E and FY09E respectively. At CMP of Rs. 372 the stock is trading at 14.23x FY08E and 10.88xFY09E earnings per share. We initiate coverage on Tata Chemicals Ltd with a BUY recommendation and price-objective of Rs.444 (implying a forward P/E multiple of 13x) on account of growth from its Inorganic and fertilizer segment.

Source: Asit C Mehta