CMP 425.65 Target Price 475.00 ISIN: INE092A01019 DECEMBER 3 rd , 2015 TATA CHEMICALS LIMITED Result Update (CONSOLIDATED BASIS): Q2 FY16 BUY Index Details Stock Data Sector Commodity Chemicals BSE Code 500770 Face Value 10.00 52wk. High / Low (Rs.) 525.70/363.30 Volume (2wk. Avg.) 38000 Market Cap (Rs. in mn.) 108464.13 Annual Estimated Results (A*: Actual / E*: Estimated) YEARS FY15A FY16E FY17E Net Sales 172029.40 183211.31 195010.12 EBITDA 22753.90 23571.59 24918.50 Net Profit 5964.60 6295.06 6679.16 EPS 23.41 24.70 26.21 P/E 18.18 17.23 16.24 Shareholding Pattern (%) (QUARTERLY) As on Sep-15 As on Jun-15 PROMOTER 30.98 30.98 FIIs 21.58 18.9 DIIs 25.59 28.3 OTHERS 21.85 21.82 1 Year Comparative Graph TATA CHEMICALS LTD S&P BSE SENSEX SYNOPSIS Tata Chemicals Ltd (TCL) is currently the world’s second largest producer of soda ash with manufacturing plants in India, the UK, Kenya and the US. Group revenue for the current year of Sep quarter rose by 4.03% y-o-y to Rs. 49969.20 million from Rs. 48031.50 million, when compared with the prior year period. In Q2 FY16, the company has posted a net profit after taxes, minority interest and share of profit / (loss) of associates of Rs. 2549.40 million for the quarter ended 30 th Sep, 2015 as compared to Rs. 2570.10 million for the quarter ended 30 th Sep, 2014. In Q2 FY16, EBITDA Stood at Rs. 6883.90 million as compared to Rs. 6968.20 million in the corresponding period of the previous year. For the 2 nd quarter of FY16, Revenue from Fertilizers segment grew by 9% to Rs.21519.70 million from Rs.19723.40 million in the corresponding quarter of Last year. In Q2 FY16, Revenue from Inorganic chemicals stood at Rs. 21313.20 million, rose by 5% as compared to Rs. 20230.50 million in Q2 FY15. Consumer Products business continues to grow and maintained its leadership position with a market share of 67.3% in the national branded edible salt market. Net Sales grew by 4.79% to Rs. 90638.30 million for the end of H1 FY16 compared to Rs. 86497.90 million for the end of H1 FY15. Net sales of the company are expected to grow at a CAGR of 7% over 2014 to 2017E. PEER GROUPS CMP MARKET CAP EPS P/E (X) P/BV(X) DIVIDEND Company Name (Rs.) Rs. in mn. (Rs.) Ratio Ratio (%) Tata Chemicals Ltd 425.65 108464.13 23.41 18.18 1.95 125.00 Aarti Industries Ltd 493.75 41139.40 26.14 18.89 4.54 110.00 Pidilite Industries Ltd 552.70 283355.70 11.77 46.96 12.06 290.00 Deepak Fertilizers & Petrochemicals Corp 155.20 13689.40 11.36 13.66 0.90 40.00
SYNOPSISTata Chemicals Ltd (TCL) is currently the world’ssecond largest producer of soda ash withmanufacturing plants in India, the UK, Kenya and theUS.Group revenue for the current year of Sep quarter roseby 4.03% y-o-y to Rs. 49969.20 million from Rs.48031.50 million, when compared with the prior yearperiod.In Q2 FY16, the company has posted a net profit aftertaxes, minority interest and share of profit / (loss) ofassociates of Rs. 2549.40 million for the quarter ended30th Sep, 2015 as compared to Rs. 2570.10 million forthe quarter ended 30th Sep, 2014.In Q2 FY16, EBITDA Stood at Rs. 6883.90 million ascompared to Rs. 6968.20 million in the correspondingperiod of the previous year.For the 2nd quarter of FY16, Revenue from Fertilizerssegment grew by 9% to Rs.21519.70 million fromRs.19723.40 million in the corresponding quarter ofLast year.In Q2 FY16, Revenue from Inorganic chemicals stoodat Rs. 21313.20 million, rose by 5% as compared to Rs.20230.50 million in Q2 FY15.Consumer Products business continues to grow andmaintained its leadership position with a market shareof 67.3% in the national branded edible salt market.Net Sales grew by 4.79% to Rs. 90638.30 million forthe end of H1 FY16 compared to Rs. 86497.90 millionfor the end of H1 FY15.Net sales of the company are expected to grow at aCAGR of 7% over 2014 to 2017E.PEER GROUPS CMP MARKET CAP EPS P/E (X) P/BV(X) DIVIDEND
Company Name (Rs.) Rs. in mn. (Rs.) Ratio Ratio (%)
Analysis & Recommendation- ‘BUY’Better margins and overall improved performance at Tata Chemicals Magadi and positive performance by theother businesses took the consolidated revenue at Rs. 49969.20 million, up by 4.03% on YoY basis in Q2 FY16,when compared to Rs. 48031.50 million in Q2 FY15. The Group has posted a net profit after taxes, minorityinterest and share of profit / (loss) of associates of Rs. 2549.40 million for the quarter ended 30th September,2015 as compared to Rs. 2570.10 million for the quarter ended 30th September, 2014. The quarter under reviewsaw the chemicals and consumer business portfolio registering satisfactory numbers. The marked improvementin the Chemicals business has been a reflection of the improved performance at Magadi. While the steam turbineproject has been successfully implemented in UK, the company continues to remain vigilant and focused onfurther opportunities to improve business. An uneven and deficit monsoon has impacted fertiliser and other agri-input businesses.The Consumer Products business continues to grow and maintained its leadership position with a market shareof 67.3% in the national branded edible salt market. In line with its focus on expanding the consumer productsbusiness, the company launched a range of spices in the last quarter, bringing everyday food products includingpulses, under the newly introduced umbrella brand, Tata Sampann. The Nutraceuticals business also increasedits reach with its product FOS now available across 70 cities in India. In the fertilizer business, the subsidyoutstanding is Rs 1,005 crores as on 30th September 2015, and still remains a challenge. Going forward inFY2015 -16, the company expects the Indian market to continue the overall growth momentum, and also remainpositive about the growth across our businesses and transformation to a more consumer facing portfolio. OverFY2014-17E, we expect the company to post a CAGR of 7% in its top-line. Hence, we recommend ‘BUY’ for
‘Tata Chemicals Ltd’ with a target price of Rs. 475.00 on the stock
QUARTERLY HIGHLIGHTS (CONSOLIDATED)
Results updates- Q2 FY16,Tata Chemicals Ltd is the world’s second largestproducer of soda ash with manufacturing facilities inAsia, Europe, Africa and North America, reported itsfinancial results for the quarter ended 30thSeptember, 2015.Rs. In million Sep-15 Sep-14 Change %
Net Sales 49969.20 48031.50 4.03
Net Profit 2549.40 2570.10 (0.81)
EPS 10.00 10.09 (0.81)
EBITDA 6883.90 6968.20 (1.21)The company’s consolidated revenue for the quarter rose by 4.03% to Rs. 49969.20 million from Rs. 48031.50million, when compared with the prior year period. In Q2 FY16, Net profit stood at Rs. 2549.40 million comparedto Rs. 2570.10 million in the prior period of last year. During the quarter, Profit before interest, depreciation andtax was at Rs. 6883.90 million as against Rs. 6968.20 million in the corresponding period of the previous year.The company has reported an EPS of Rs. 10.00 for the 2nd quarter of financial year 2015-16 as against an EPS ofRs. 10.09 in the corresponding quarter of the previous year.
Break up of ExpenditureDuring the quarter, the total expenditure rose by 5 per cent mainly on account of increase in Cost of MaterialConsumed by 16%, Fright & Forwarding charges 8%, other expenditure 7% along with Purchase of Stock inTrade by 33% are the main attribute for the increase of Expenditure when compare to corresponding quarter ofprevious year. Total expenditure in Q2 FY16 was at Rs. 44723.70 million as against Rs. 42665.60 million in Q2FY15.Break up of Expenditure
Rs. In millions
Q2 FY16 Q2 FY15
Fright & Forwarding Charges 5153.20 4783.40
Other Expenditure 7437.60 6950.30
Power & Fuel 4836.30 5231.40
Cost of Material Consumed 13286.20 11465.40
Employee Benefit Expenses 3465.30 3116.50
Depreciation & AmortizationExpense
1171.00 1201.20
Purchase of Stock in Trade 12024.40 9013.90
Segment Revenue
Latest Updates.Key performance and financial highlights:
Standalone
Robust performance in Soda Ash and Salt business. Consumer portfolio revenues up by 35% over Q2 FY14-15. Spices Launched successfully in NCR and states of North India. Subsidy receivable at Rs. 10050.00 million as on 30th September, 2015.Consolidated
Magadi continues positive performance with improved profitability in Q2 FY15-16. Steam turbine in full operation in UK, continued focus on further operational improvements. US volumes impacted due to production outages; being addressed. Adverse climatic conditions impact Rallis India performance.COMPANY PROFILEA part of the over US$ 100 billion Tata Group, Tata Chemicals Limited, in its 75th year, is a global company withinterests in businesses that focus on LIFE —Living, Industrial and Farm Essentials. The story of the company isabout harnessing the fruits of science for goals that go beyond business.Tata Chemicals is the pioneer and market leader in India’s branded Iodised salt segment. With the introduction ofan innovative, low-cost, nanotechnology based water purifier; it is providing affordable, safe drinking water tothe masses. Extending its portfolio from salt to other food essentials, TCL unveiled India’s first national brand ofpulses in 2010. Tata Chemicals has been rated as one of the top 10% in Business and Consumer brands across allindustry and consumer brand categories in India by Superbrands.The company’s Industry Essentials product range provides key ingredients to some of the world’s largestmanufacturers of glass, detergents and other industrial products. Tata Chemicals currently is the world’s secondlargest producer of soda ash with manufacturing facilities in Asia, Europe, Africa and North America. StartingApril 1st 2011, these key international subsidiaries have been rebranded as Tata Chemicals Europe Limited(TCE), Tata Chemicals Magadi Limited (TCM), Tata Chemicals South Africa Pty Limited, Tata Chemicals NorthAmerica Inc. (TCNA), and Tata Chemicals (Soda Ash) partners (TCSAP).With its Farming Essentials portfolio the company has carved a niche in India as a crop nutrients provider. It is aleading manufacturer of urea and phosphatic fertilizers and, through its subsidiary Rallis, has a strong position inthe crop protection business.
The Tata Chemicals Innovation Centre is home to world class R&D capabilities in the emerging areas ofnanotechnology and biotechnology. The company’s Centre for AgriSolutions and Technology provides advice onfarming solutions and crop nutrition practices.The company has also entered into a joint venture with Temasek Life Sciences Laboratory Ltd. Singapore (JOiL)to develop jathropa seedlings to enable bio fuels capability.In line with its mission, ‘serving society through science’, the company is applying its expertise in sciences, todevelop high-tech and sustainable products.Products
Living Essentials Consumer Salt Pulses: i-Shakthi Water purifier: Tata Swach
a) Share Capital 2548.20 2548.20 2548.20 2548.20b) Reserves and Surplus 53106.90 52968.90 60914.24 68223.94
1. Sub Total - Net worth 55655.10 55517.10 63462.44 70772.142. Minority Interest 6552.2 6734.9 7273.69 7448.26Non Current Liabilities
a) Long term borrowings 68830.70 57082.50 55027.53 51725.88b) Deferred Tax Liabilities 2769.20 2271.60 2498.76 2698.66c) Other Long term Liabilities 1649.10 171.60 220.33 242.37d) Long Term Provisions 14959.20 16898.80 18081.72 18985.80
3. Sub Total - Non Current Liabilities 88208.20 76424.50 75828.34 73652.71Current Liabilities
a) Short Term Borrowings 14865.40 12931.90 11380.07 10242.06b) Trade Payables 20390.50 26430.70 34359.91 40544.69c) Other Current Liabilities 9266.80 22379.90 24617.89 26587.32d) Short Term Provisions 6780.90 7637.10 8248.07 8660.47
4. Sub Total - Current Liabilities 51303.60 69379.60 78605.94 86034.55TOTAL EQUITY AND LIABILITIES (1+2+3+4) 201719.10 208056.10 225170.41 237907.66ASSETSNon-Current Assets
Minority Interest -258.00 -534.70 -629.10 -450.44Share of Profit & Loss of Asso -7.30 -7.40 -15.70 -10.68Net Profit (741.70) 1530.40 2549.40 2450.51Equity capital 2548.20 2548.20 2548.20 2548.20
Face value 10.00 10.00 10.00 10.00EPS (2.91) 6.01 10.00 9.62
Ratio Analysis
Particulars FY14A FY15A FY16E FY17E
EPS (Rs.) (40.50) 23.41 24.70 26.21
EBITDA Margin (%) 12.28 13.23 12.87 12.78
PBT Margin (%) (3.26) 6.73 6.40 6.34
PAT Margin (%) (5.08) 4.69 4.51 4.49
P/E Ratio (x) (10.51) 18.18 17.23 16.24
ROE (%) (14.51) 14.54 13.02 12.37
ROCE (%) 17.39 21.82 21.81 22.54
Debt Equity Ratio 1.50 1.26 1.05 0.88
EV/EBITDA (x) 12.72 8.99 8.45 7.72
Book Value (Rs.) 218.41 217.87 249.05 277.73
P/BV 1.95 1.95 1.71 1.53
Charts
OUTLOOK AND CONCLUSION
At the current market price of Rs.425.65, the stock P/E ratio is estimated 17.23 x FY16E and 16.24 x FY17Erespectively. Earning per share (EPS) of the company for the earnings for FY16E and FY17E is seen at Rs. 24.70 and Rs.26.21 respectively. Net Sales of the company is expected to grow at a CAGR of 7% over 2014 to 2017E. On the basis of EV/EBITDA, the stock trades at 8.45 x for FY16E and 7.72 x for FY17E. Price to Book Value of the stock is expected to be at 1.71 x and 1.53 x respectively for FY16E and FY17E. We recommend ‘BUY’ in this particular scrip with a target price of Rs.475.00 for Medium to Long terminvestment.
INDUSTRY OVERVIEW
Global EconomyAll major advanced economies are expected to show improved growth in 2015 and 2016. However, the globaleconomy is still struggling to gain momentum. As per the International Monetary Fund, the global economy grewby 3.4% in 2014 and is expected to grow only marginally higher at 3.5% in 2015 and to touch 3.8% in 2016.Growth in major emerging and developing economies (except India) is projected to be lower, primarily reflectingweaker prospects for some large emerging market economies and oil-exporting countries. Emerging market anddeveloping economies still accounted for 70% of world growth in 2014.Domestic EconomyThe Indian economy is slowly recovering, its high fiscal and current account seem to be under control. The GDPgrowth rate for FY 2014-15 (based on the new series) is 7.3%. GDP growth increased to 7.5% in Q4 FY 2014-15,compared to 6.6% in Q3 FY 2014-15. The Reserve Bank of India (RBI) excepts GDP to grow by 7.6% in FY 2015-16. FY 2014-15 saw a decline in both wholesale and retail inflation with an average Wholesale Price Index (WPI)of 2.06% in FY 2014-15 (FY 2013-14: 5.98%) and an average Consumer Price Index (CPI) at 6.43% in FY 2014-15 (FY 2013-14: 9.5%) in April-March 2015. Food price inflation has also reduced. The sharp reduction ininternational oil prices also eased the pressure on inflation as well as fiscal deficit. The Central Governmentprojects that India will reach the fiscal deficit target of 4.1% in FY 2014-15 and 3.9% in FY 2015-16 based on thesuccess of the coal and telecom spectrum auctions. This has prompted RBI to begin an accommodative monetarypolicy cycle and reduce the key lending rate, the Repo Rate by 50 basis points to 7.5% in two installments.The Current Account Deficit (CAD) in the third quarter of FY 2014-15 came down to 1.6% of GDP, compared to2.0% in the second quarter of FY 2014-15. This reduction in the CAD was mainly due to a pick-up in net exportsof services and lower net outflows under primary income (profit, dividend and interest). However, the CAD forthe entire year should be under control as lower oil prices would help reduce the import bill.Industry Structure and DevelopmentsTata Chemicals Ltd is an integrated manufacturer of basic and value-added chemicals, key among them beingsoda ash and sodium bicarbonate. With a global capacity of approximately 4.3 million tonnes across itsmanufacturing facilities in India, UK, Kenya and USA, the Company has a competitive advantage of being theworld’s most geographically diversified soda ash company with a 6.5% global capacity share (~70% of thiscapacity is natural soda ash based). The Company’s natural soda ash operations are located at the Green RiverBasin, Wyoming in the USA, where the world’s largest deposits of trona occur, and at Lake Magadi in Kenya.
Natural soda ash helps the Company to have manufacturing processes with low energy and environmentalfootprint. Synthetic soda ash and sodium bicarbonate are manufactured at Mithapur, India and Northwich, UK.This process uses brine (salt water) and limestone as key raw materials.Soda Ash
The global soda ash demand grew at 2.8% to 55.6 million tonnes in 2014 from 54.1 million tonnes in 2013.Emerging economies have been the primary growth driver for soda ash over the past decade. Overall, worlddemand is forecast to grow at 4% p.a. through 2018, with the construction of new flat glass production facilitiesin developing regions fuelling this demand growth. Indian demand grew by 10% in FY 2014-15, largely driven byimproving economic sentiment and a base of subdued growth in the previous year. While new detergentmanufacturing facilities and flat glass lines contributed to fresh demand, container glass production capacity de-idling has also been driving volumes. North American demand for soda ash in 2014 remained flat compared to2013, a significant improvement on the 2-5% decline in recent years.Global soda ash production capacity increased approximately 2% to 67 million tonnes with most of the capacityaddition occurring in China. Overcapacity in the market continues to be region specific with China and Europehaving more capacity than demand while producers in US, Turkey and India are operating at higher rates. Worldoperating rates remained around 82-83% for the year. As per industry report(s), global supply is forecast togrow at 4.7% p.a. through 2018, with China and Turkey leading this capacity addition.Globally, prices remained regionally biased as commodity prices witnessed major correction. While Chineseprices started on a high, prices reduced due to low input costs. Indian subcontinent prices remained within arelatively tight band for most of the year with a marginally increasing trend. North American pricing showed anincreasing trend through the year and Turkish export prices went through a mid-year correction on the basis ofsubdued exports.Sodium Bicarbonate
Sodium bicarbonate is commonly used as an ingredient in leather tanning, dyes and textiles, food additives,animal feed, pharmaceuticals and air pollution control. The Company is the world’s fourth largest producer ofsodium bicarbonate with about 6% capacity share (FY 2014-15) and is the market leader in India and UK.A demand growth of almost 13% in the Indian market reinforced our view that sodium bicarbonate will continueto demonstrate healthy growth across all consuming sectors, particularly in food related applications. In India,the Company maintained a market share of over 50% in the domestic market despite record high imports ofalmost 40,000 tonnes. In UK, the market continues to grow at about 5% per year with opportunities particularlyin export markets of Asia. TCE’s market share grew towards the end of the year following its businessrestructuring in 2014.
OutlookGiven the favourable macro-economic trends in emerging economies, higher infrastructure investment andincreasing disposable income, the Company continues to believe in the long term fundamentals of the soda ashand sodium bicarbonate industry. In the backdrop of this positive business outlook, the Company has embarkedon the LEAP strategy. The annual demand growth of soda ash in India is expected to be around 5% over the next5 years. This projected increase in domestic demand is expected to more than offset any potential increase indomestic capacity through green-field capacity addition or brown-field de-bottlenecking. Imports are expected togrow with continuation of fair trade policies in place. Demand growth from glass can be expected as majorplayers may have plans for new lines in the short to medium term. New capacity in detergent manufacturing isalso expected. With moderate inventory levels, growth is expected to be within the range of 4-5%. Apart fromnew production facilities, growth is also expected from increased specific consumption in product formulationsin the medium term.Sodium bicarbonate continues to offer immense potential as the domestic industry matures. Growth rates of 8-10% p.a. are anticipated for the next 5 years with increasing value-addition and branding. Apart from thetraditional sectors of food and animal feed, development of applications in flue gas treatment and uraniumleaching may lead to high demand. Outlook for TCNA remains positive with its soda ash production continuing toremain sold out driven by healthy demand growth. Price outlook for both, domestic and export markets,continues to remain positive. Opportunities continue to present themselves in the overseas markets. Work hasnow begun in earnest on a project to drive production and operational excellence improvements across the fourkey areas of the business: Mining, Making, Moving and Marketing.Soda ash demand growth for TCML is expected to remain stable in FY 2015-16. However, price realisations areexpected to vary as a few key markets remain oversupplied and the threat of Chinese exports in the Far East. Thede-bottlenecking of SAM plant and other improvements will increase the production volumes over the next 5years. Market development and introduction of new product variants will increase salt volumes.TCE expects to continue to strengthen its performance with growth forecast in soda ash, sodium bicarbonate andsalt during FY 2015-16. Specifically, the commissioning of the new 14 MW steam turbine is expected to providesignificant boost to soda ash\ energy efficiencies.
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