TATA Chemicals Ltd HOLD SYNOPSIS. V.S.R. Sastry Vice President Equity Research Desk

Transcription

1 TATA Chemicals Ltd HOLD CMP: Rs Date: February 25, 2010 Key Ratios: Particulars FY09 FY10E FY11E OPM (%) NPM (%) ROE (%) ROCE (%) P/BV(x) P/E(x) EV/EBDITA(x) Debt Equity Ratio Key Data: Sector Fertilizers Face Value Rs wk. High/Low (Rs.) /99.70 Volume (2 wk. Avg.) BSE Code V.S.R. Sastry Vice President Equity Research Desk vsrsastry@firstcallindiaequity.com Target Price: Rs Market Cap.: Rs mn. SYNOPSIS We initiated Coverage of TATA Chemicals Ltd and set a target Price of Rs Tata Chemicals Limited (TCL) is India's leading manufacturer of inorganic chemicals, fertilisers and food additives. It is the world's second largest producer of soda ash. With manufacturing facilities in India, UK, the Netherlands, Kenya and USA. Tata Chemicals, the second largest producer of Soda Ash in the world has launched Tata Swach - a unique and innovative water purifier. Tata Chemicals Ltd has acquired 35.68% stake in Rallis India for about Rs 3.63 billion. Net sales of the company are expected to grow at a CAGR of 21% over 2008 to 2011E. Share Holding Pattern: Dr. V.V.L.N. Sastry Ph.D. Chief Research Officer drsastry@firstcallindia.com 1

2 Table of Content Investment Highlights...3 Company Profile..5 Business Area...6 Peer Group comparison...11 Keyconcern...11 Financials..12 Charts...14 Outlook and conclusions...16 Industry Overview

3 Investment Highlights Q3 FY10 Results Update TATA Chemicals Ltd has disclosed its consolidated results for the quarter ended December 31, The company has posted a net profit of Rs million for the quarter ended December 31, 2009 as compared to Rs million for the quarter ended December 31, 2008, up %. Net sales for the quarter is declined by 24.51% to Rs million as against for Rs million for same quarter last year. Total Income for the quarter stood at Rs million indicating with decline of 24.34%. For the quarter EPS of the company is stood at Rs Quarterly Results - Consolidated (RS in mn) As At Dec-09 Dec-08 %change Net sales (24.51) Net profit Basic EPS TATA chemicals launch water purfier Tata Chemicals, the second largest producer of Soda Ash in the world has launched Tata Swach - a unique and innovative water purifier. It is replaceable filter based product which does not require electric power or running water to operate. 3

4 Based on low cost, natural ingredients the product delivers safe drinking water at a new market benchmark of Rs 30 per month. It can purify up to 3,000 litres of water after which the cartridge bulb stops water flow. The water purifier gives the user enough lead time for catridge replacement. Tata Swach is the result of years of collaboration between several Tata companies including TCS, Tata Chemicals and Titan. Based on an innovative concept developed by the TCS Innovation Labs - TRDDC, the Swatch technology combines low cost ingredients such as rice husk ash with superior nano - technology. The efficiency of the product has been rigorously tested to meet internationally accepted water purification standards. Allotment of shares Tata Chemicals Ltd has sold Equity Shares of Rs. 10/- each of Titan Industries Ltd to Tata Sons Ltd as a block deal on the Stock Exchange at a price of Rs /- per equity share on September 11, TCL Buys 35.68% stake in Rallis India Tata Chemicals Ltd has acquired 35.68% stake in Rallis India for about Rs 3.63 billion. It bought nearly 4.27 million equity shares at a price of Rs 850/- per share in off-market transactions from other promoter group companies today. With the acquisition, the shareholding of the company in Rallis India stands increased from nearly 1.13 million equity shares (9.40% of the paid up capital) to nearly 5.40 million equity shares (45.08% of the paid up capital). 4

5 Break up of Expenditure Company Profile Tata Chemicals Limited (TCL) is a global company with interests in chemicals, crop nutrition and consumer products. It is the world's second largest producer of soda ash. With manufacturing facilities in India, UK, the Netherlands, Kenya and USA, TCL is the world s most geographically diversified soda ash company, with an efficient supply chain that can service customers better and faster across the globe. Established in 1939 at Mithapur (in Gujarat, India), TCL is a part of the Tata group. The company is a pioneer and market leader in the Indian branded iodised salt segment and India's leading producer of nitrogenous and phosphatic fertilisers. TCL s global soda ash capacity is around 5.5 million tonnes per annum, out of which 60 per cent capacity is from natural soda ash deposits at Wyoming, USA and Lake Magadi, Kenya. Along 5

6 with soda ash (sodium carbonate), the company also manufactures sodium bicarbonate and bulk chemicals such as sulphuric acid, phosphoric acid, and sodium tripoly phosphate (STPP). The company has extended its operations into the services sector and touches lives through applications in agriculture, animal nutrition, construction, consumer products, glass, metals, pharmaceuticals, soaps and detergents, and textiles and leather industries. Global reach: Since 2005 Tata Chemicals has adopted an internalisation strategy. It acquired an equal partnership in Indo Maroc Phosphore SA (IMACID), along with Chambal Fertilisers and global phosphate major OCP of Morocco in that year. In early 2006, it completed the acquisition of UK based Brunner Mond Group and its subsidiary, the Magadi Soda Company in Kenya. Business Area: 6

7 Chemicals: a) Soda Ash: Tata Chemicals is the world's second largest producer of soda ash with a global capacity of around 5.5 million tonnes per annum, of which 60 per cent capacity is from natural soda ash deposits at Wyoming, USA and Lake Magadi, Kenya. Soda ash is manufactured synthetically at TCL's Mithapur plant in India and Brunner Mond's plants in the UK and the Netherlands. At Mithapur, TCL uses the conventional Solway process to produce soda ash. b) Sodium Bicarbonate Tata Chemicals' sodium bicarbonate business focuses on global markets and new business applications. The company makes sodium bicarbonate for pharmaceutical and industrial use, and as a food additive. TCL's sodium bicarbonate plant has a capacity of 50,000 tonnes per annum. Its products sell in India, the Middle East, Africa and Bangladesh. c) Alkakarb Alkakarb, the first animal feed grade sodium bicarbonate in India, is TCL's first step towards value-added bicarbonate business. The company desires to use the bicarbonate brands already conceived by Brunner Mond so as to have homogeneity across its business geographies. d) Chemicals connections I. Caustic soda TCL is able to deliver low-cost caustic soda to the market due to its adoption of energyefficient, membrane-cell technology and the captive availability of salt and of power at the Mithapur facility. 7

8 II. Chlorine based products TCL produces hydrochloric acid and liquid chlorine at its Mithapur facility. Brunner Mond makes and sells calcium chloride in its UK facilities. III. Bromine based products TCL manufactures several variants of bromine and bromine-based compounds, such as liquid bromine technical, hydrobromic acid and sodium bromide (photographic grade). Bromine is used primarily in the manufacture of organic and inorganic bromides IV. Gypsum Gypsum, formed in crystalline lumps or powder form, is yet another product from the Tata Chemicals stable. Gypsum is used as an ingredient for Portland cement, for soil treatment, and to stabilise volatile compounds and dissolve nitrogenous ones V. Phosphoric and sulphuric acids TCL's Haldia plant produces industrial grade phosphoric and sulphuric acids; these are inputs to the manufacturing of phosphatic fertilisers at the plant, and are also a part of TCL's product portfolio. Crop nutrition and agri-business Fertilisers Nitrogen, phosphorous and potassium are key agro-nutrients for crops. In India Tata Chemicals is present in all three crop nutrition groups through its fertiliser product base that spans: a) Urea Urea is an important nitrogenous fertiliser. The nature of the soil in many Indian regions is such that nitrogenous fertilisers are an important input for most crops. Tata Chemicals is a major manufacturer of the product in India. 8

9 b) Phosphatic fertilisers Tata Chemicals manufactures several key phosphatic fertilisers that are leading brands in the Indian market. The company makes and sells sodium tripolyphosphate (STPP), diammonium phosphate (DAP), NPK complexes and single super phosphate (SSP) fertilisers at its Haldia complex in West Bengal Consumer products a) Salt Tata Chemicals is the market leader in packaged salts in India with more than half the total market consuming Tata brands. The reason: Tata Salt and its fellow brands go far beyond taste to target health initiatives such as iodine deficiency and low sodium requirements. The company manufactures four varieties of salt: iodised salt, crystalline salt, vacuum salt and pure salt. b) Cooking soda Tata Chemicals' sodium bicarbonate business focuses on global markets and new business applications. The company makes sodium bicarbonate for pharmaceutical and industrial use, and as a food additive. TCL's sodium bicarbonate plant has a capacity of 50,000 tonnes per annum. Its products sell in India, the Middle East, Africa and Bangladesh. Bio fuel Tata Chemicals' biofuels business has grown out of its extensive expertise in chemicals manufacturing, the agriculture and crop-nutrition space, and its research capability through the Innovation Centre. Its product portfolio includes: Bioethanol, Bio diesel 9

10 Fresh Produce Tata Chemicals, through its new business venture Khet-Se, has set up a state-of-the-art facility for fresh fruit and vegetables sourcing, packaging and distribution. The first centre has already opened in Malerkotla, Punjab; the next will come up in Mumbai. Services With years of expertise in the agri-business space, Tata Chemicals has extended its business operations into the services sector in India. Tata Kisan Sansar Tata Kisan Sansar outlets form a network of franchised retail outlets in the Indian states of Uttar Pradesh, Uttaranchal, Punjab, Haryana, Jharkhand, West Bengal and Bihar. The network of agri-service centers, serve an area of around 22,000 villages, with access to over 3.5 million farmers. The centres are one-stop resource centres they stock seeds, pesticides and fertilisers, lease out farm equipment and implements, and provide services such as soil testing and mapping, fertiliser mapping, credit finance, crop insurance, etc. Khet Se Tata Chemicals, through its new business venture Khet-Se Agriproduce India, has set up stateof-the-art facilities for fresh fruit and vegetables sourcing, packaging and distribution. The first centre has already opened in Punjab; the next will come up in Maharashtra. Khet-Se will source fruits and vegetables for the fruit and vegetable retailer through its conveniently located wholesale stores. 10

11 Call centres Tata Chemicals has set up business process outsourcing (BPO) centres in Mithapur, Gujarat and Babrala, Uttar Pradesh. These centres are unique in the sense that they are based in rural India, and thus provide employment and self-sustaining community development opportunities to the communities of these areas. Subsidiaries and JV Brunner Mond Magadi Soda Khet-Se General Chemical Industrial Products (GCIP) Peer Group Comparison Name of the company CMP (Rs.) Market Cap.(Rs.mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend(%) TATA Chemicals Ltd United Phosphorus Ltd Nagarjuna Agrichem Ltd Basant Agro Tech Ltd Key Concerns Uncertainties in Government Policies with regard to Fertiliser subsidy affecting realization and profitability. The raw material price is uncertain and any steep rise in the raw material will affect the company s profits 11

12 Financials Results 12 Months Ended Profit & Loss Account (Consolidated) Value(Rs.in.mn) FY08 FY09 FY10E FY11E Description 12m 12m 12m 12m Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross profit Deprecation Exceptional Items Profit Before Tax Tax Profit After Tax Minority Interest Share of P& L Assoc Net Profit Equity capital Reserves Face value (Rs.)

13 EPS Quarterly Ended Profit & Loss Account (Consolidated) Value(Rs.in.mn) 30-Jun Sep Dec Mar-10E Description 3m 3m 3m 3m Net sales Other income Total Income Expenditure Operating profit Interest Gross profit Deprecation Exceptional Items Profit Before Tax Tax Profit After Tax Minority Interest Share of P& L Assoc Net Profit Equity capital Face value (Rs.)

14 EPS Charts: 14

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16 1 Year Comparative Graph TATA Chemicals Ltd BSE SENSEX Outlook and Conclusion At the current market price of Rs , the stock is trading at 9.81 x FY10E and 8.68 x FY11E respectively. Price to Book Value of the stock is expected to be at 1.17 x and 1.01 x respectively for FY10E and FY11E. Earning per share (EPS) of the company for the earnings for FY10E and FY11E is seen at Rs and Rs respectively. Net Sales of the company are expected to grow at a CAGR of 21% over 2008 to On the basis of EV/EBITDA, the stock trades at 3.08 x for FY10E and 3.15 x for FY11E. Tata Chemicals, the second largest producer of Soda Ash in the world has launched Tata Swach - a unique and innovative water purifier. Tata Chemicals Ltd has acquired 35.68% stake in Rallis India for about Rs 3.63 billion. We expect that the company will keep its growth story in the coming quarters also. We recommend HOLD in this particular scrip with a target price of Rs

17 Industry Overview Fertilizer sector The Indian fertilizer industry has succeeded in meeting almost fully the demand of all chemical fertilizers except for MOP. The industry had a very humble beginning in 1906, when the first manufacturing unit of Single Super Phosphate (SSP) was set up in Ranipet near Chennai with an annual capacity of 6000 MT. The Fertilizer & Chemicals Travancore of India Ltd. (FACT) at Cochin in Kerala and the Fertilizers Corporation of India (FCI) in Sindri in Bihar were the first large sized -fertilizer plants set up in the forties and fifties with a view to establish an industrial base to achieve self-sufficiency in food grains. Subsequently, green revolution in the late sixties gave an impetus to the growth of fertilizer industry in India. The seventies and eighties then witnessed a significant addition to the fertilizer production capacity. Fertilizer sector is a very crucial for Indian economy because it provides a very important input to agriculture. The fertilizer industry in India has played a pivotal role in achieving self sufficiency in food grains as well as in rapid and sustained agriculture growth. India is the third largest producer and consumer of fertilizers in the world after China and the United States. The growth of the Indian fertilizer industry has been largely determined by the policies pursued by the government. The government exercised extensive controls on the pricing, distribution and movement of fertilizers. The industry is capital intensive and the production process energy intensive with the combined cost of feedstock and fuel accounting for anywhere between 55 and 80 per cent of cost of production, depending on the type of fertilizers. Determinants of Fertilize Demand Rainfall and irrigation facilities Relative prices of fertilizers Cropping pattern Government policies Rising demand for fertilizers There has been significant growth in the consumption of fertilizers in last three years due to overall good monsoon. The growth in NPK consumption was 9.50% in , % in and 8.40% per cent in Against the robust growth in consumption, domestic fertilizer production has remained range bound in the last decades. The surge in fertilizers demand and stagnant to modest increase in production 17

18 has widened the gap between consumption and production causing larger dependence on imports. Therefore, the rising demand for fertilizers is providing ample scope for the companies in this sector to increase their production capacity and volumes thereby, driving the growth of fertilizer sector. The installed capacity as on has reached a level of lakh MT of nitrogen (inclusive of an installed capacity of lakh MT of urea after reassessment of capacity) and lakh MT of phosphatic nutrient, making India the 3rd largest fertilizer producer in the world. The rapid build-up of fertilizer production capacity in the country has been achieved as a result of a favorable policy environment facilitating large investments in the public, co-operative and private sectors. Presently, there are 57 large sized fertilizer plants in the country manufacturing a wide range of nitrogenous, phosphatic and complex fertilizers. Out of these, 29 unit produce urea, 20 units produce DAP and complex fertilizers 13 plants manufacture Ammonium Sulphate (AS), Calcium Ammonium Nitrate (CAN) and other low analysis nitrogenous fertilizers. Besides, there are about 64 medium and small-scale units in operation producing SSP The Indian fertilizer industry has come a long way since its early days post independence. India today is one of the largest producer and consumer of Fertilizers in the world. India s production in terms of nutrients (N & P) reached a level of 155 lakh MT in from 0.39 lakh MT in Similarly, consumption of fertilizers in terms of nutrients (NPK) has also grown from about 0.66 lakh MT in to nearly 184 lakh MT in The Indian Fertilizer industry, given its strategic importance in ensuring self sufficiency of food grain production in the country, has for decades, been under Government control. The Government has over the years, provided subsidies/ concessions through the fertilizer companies to farmers and the manufacturers have been compensated through various schemes. Though the Government control helped in meeting the objective of ensuring creation of capacities and ultimately achieving self-sufficiency in food grain production, it did not encourage improving efficiencies in the sector. Burgeoning subsidy bill and the need to focus on fiscal prudence, Government polices in recent times are aimed at encouraging efficiencies in the sector. Policy measures like the new pricing scheme have made the operations of less efficient players unviable. The Government polices today are oriented towards achieving the stated objective of total deregulation in the sector. However, the uncertainty over exact policy parameters and absence of a comprehensive long term policy has not augured well for the industry. The financial year began with practically no clarity on the policy parameters for both nitrogenous and phosphatic fertilizers. 18

19 Another important issue confronting the sector is with respect to the feedstock. Natural gas which is the main feedstock for production of nitrogenous fertilizers is available in limited quantities and the industry competes with the power sector for its share. With the Government policy favoring conversion to gas based units, the demand for gas is only expected to go up in the future, which may in turn lead to further shortages. The Indian fertilizer industry has come a long way since its early days post independence. India today is one of the largest producer and consumer of Fertilisers in the world. India s production in terms of nutrients (N & P) reached a level of 155 lakh MT in from 0.39 lakh MT in Similarly, consumption of fertilizers in terms of nutrients (NPK) has also grown from about 0.66 lakh MT in to nearly 184 lakh MT in The Indian Fertilizer industry, given its strategic importance in ensuring self sufficiency of food grain production in the country, has for decades, been under Government control. The Government has over the years, provided subsidies/concessions through the fertilizer companies to farmers and the manufacturers have been compensated through various schemes. Though the Government control helped in meeting the objective of ensuring creation of capacities and ultimately achieving self-sufficiency in food grain production, it did not encourage improving efficiencies in the sector. With the burgeoning subsidy bill and the need to focus on fiscal prudence, Government polices in recent times are aimed at encouraging efficiencies in the sector. Policy measures like the new pricing scheme have made the operations of less efficient players unviable. The Government polices today are oriented towards achieving the stated objective of total deregulation in the sector. However, the uncertainty over exact policy parameters and absence of a comprehensive long term policy has not augured well for the industry. For instance, the financial year began with practically no clarity on the policy parameters for both nitrogenous and phosphatic fertilizers. Another important issue confronting the sector is with respect to the feedstock. Natural gas which is the main feedstock for production of nitrogenous fertilizers is available in limited quantities and the industry competes with the power sector for its share. With the Government policy favouring conversion to gas based units, the demand for gas is only expected to go up in the future, which may in turn lead to further shortages. Similarly, in the case of phosphates, on account of the limited availability of phosphoric acid and rock phosphate in the country, domestic units are dependent to a large extent on imports. In view of the limited availability of the main feedstock within the country, fertiliser companies today are exploring the possibility of setting up joint ventures abroad to tie up their feedstock requirements. Though a few joint venture agreements have been signed with respect to supply of phosphoric acid, only a couple of joint ventures have been established with respect to urea. Domestic players have also not 19

20 been able to enter into long term gas supply agreements primarily due to differences over pricing. Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. 20

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