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TATA chemicals ICICI Direct Report

Saturday, 25 August 2007

Tata Chemicals Q3FY07 results were in line with our expectation. Standalone net sales grew 4% y-o-y to Rs 1307 crore while standalone net profit was 19% higher (y-o-y) at Rs 117 crore on the back of better realizations and higher volume.
Operating margins remained stable but net margin improved y-o-y by 114 bps to 8.95% on the back of forex gains of Rs 20.81 crore pertaining to the FCCB. On consolidated basis, the company reported a net profit of Rs 156 crore on sales of Rs 1780 crore.

The integration process of Brunner Mond acquisition was completed in this quarter, which will give Tata Chemicals a long term cost advantage. The expanded capacity at Brunner Mond Magadi, Kenya is likely to start operation from April 2007. With all business drivers on the upswing, we reiterate our Outperformer rating.

RESULT HIGHLIGHTS

· Consolidated sales improved to Rs 1,780 crore while standalone net sales grew 4% to Rs 1,307.29 crore on the back of better realisations and higher sales volumes. Brunner Mond contributed around Rs 265 crore to consolidated revenue, while IMACID, the joint venture with OCP in Morocco in which Tata Chemicals has a 33% stake, contributed Rs 208 crore to revenue.

· Soda ash sales volume and realisations both improved 4% to 1.87 million tonnes and Rs 9,075 per tonne respectively. The company maintained its market share at around 32.1%. It increased soda ash exports by over 100% y-o-y to 84,157 tonnes for the 9-month period ending Dec 2006.

· The company maintained its leadership position by cornering a market share of 46.50% in the domestic market for branded edible salt. However, volumes remained the same during the quarter, while they increased 2% for the 9-month period.

· Fertiliser off-take in volume terms was down by 2%. But for the 9- month period, sales improved by 15% to Rs 2,079 crore. As on Dec 31, 2006, the outstanding subsidy bill for nitrogenous fertilisers was Rs 112 crore. Subsidy bills take about 6-8 weeks to clear.

· Consolidated EBIDTA margin was 15.60% and standalone EBIDTA margin remained stable at 13.51% with increased revenue contribution from Brunner Mond. During the quarter, Brunner Mond’s margin was around 21% as it sold most of its product in UK where realiastions are higher than in Europe. Only 14% was sold in the rest of the Europe. Standalone operating margins got impacted due to higher fixed overheads
and increased usage of naphtha in Q3FY07 vis-à-vis that in Q3FY06. Operating margin remained stable at 13.51%.

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· Standalone net margin improved by 114 bps y-o-y to 8.85% on the back of forex gain on Rs 20.81 crore. This forex gain pertains to the FCCB, which the company had raised, and just an accounting entry. This will not increase the cash flow of the company. The company had FCCBs at a Rs-US$ exchange rate of 44.62, but the average Rs-US$ exchange rate was 44.26 resulting in Rs 0.40 per dollar notional profit to the company.
As per the new guidelines of the ICAI, this will be recorded in the P&L account of the relevant year. If rupee depreciates below 44.62, the company will have to book a notional loss in the P&L account of the relevant year.

Valuations

We expect Tata Chemicals consolidated revenue to grow at a CAGR of 25% to Rs 6,044.01 crore over FY05-FY08E. Consolidated net profit should grow at a CAGR of over 20% to Rs 593.10 crore during the same period. We believe that the integration of Brunner Mond’s operation would be earning accretive in the long run.

Further, the expanded capacity at Brunner Mond Magadi, Kenya is likely to start operation from April 2007. This will help the company to improve the consolidated operating margin. Currently, TCL is trading 8.32x FY08E consolidated EPS of Rs 27.57 and 9.58x FY07E consolidated EPS of Rs 24.

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What is Gold BEES:

We are not changing our estimates and we stick to our sum-of-parts valuation, wherein we arrive at a fair value of Rs 374. Our target price gives us an upside of 65% from the current levels. We reiterate our OUTPERFORMER rating.

Outperformer: 20% or more;
Performer: Between 10% and 20%;
Hold:+10% return;
Underperformer: -10% or more.

Source : ICICI Direct Research

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