The Hindu Business Line : Tata Chemicals: Buy

INVESTORS with a two-year perspective may consider exposures in the Tata Chemicals stock. Though the prospects for the fertiliser business are at best stable, the soda ash cycle is in a decisive up-move. The company is attempting to scale up in this business through the acquisition route. Better realisations, with healthy volume offtake for chemicals, should deliver robust earnings growth for Tata Chemicals over this fiscal and the next. At the current price of Rs 218, the stock trades at a price earnings multiple of about 12 times its trailing 12-month earnings.

The company carries a healthy investment book, which should further cushion against downside risk to the stock price.

About 60 per cent of Tata Chemicals' revenues originate from the fertiliser business. The rest is from chemicals such as soda ash, sodium tri-polyphosphate (STPP, an active ingredient for detergents) and branded salt. The chemicals business, however, contributes a higher — 51 per cent — share of profits.

Chemicals could be the key earnings driver over the next two years. Reviving demand for FMCGs should translate into better volume growth for branded salt and STPP.

With demand from glass-makers expanding due to the construction boom, the global demand-supply balance for soda ash has tightened. As a result, leading global producers of the chemical have raised prices by about 60 per cent since May 2004. Rising global prices could translate to higher realisations for domestic producers of soda ash this year.

Tata Chemicals is the market leader in the domestic soda ash market and has, of late, acquired a strong export presence. The company has also been altering its product mix in favour of dense soda ash and has recently commissioned a 600 tonne-per-day dense soda ash plant.

Dense soda ash fetches better realisations and offers superior prospects for growth as it caters to the float glass segment.

Earlier this month, Tata Chemicals also announced its intention to acquire a majority stake in Brunner Mond, a leading European producer of soda ash. This deal, if finalised, appears to have potential to substantially ramp up the scale and geographical footprint of its operations. Brunner Mond produces about 16 lakh tonnes of soda ash annually from its facilities in the UK, the Netherlands and Kenya; Tata Chemicals' output annual output is about 8.75 lakh tonnes. The acquisition, if made, could also give Tata Chemicals access to new export markets in Europe, Africa and West Asia that are currently serviced by Brunner Mond.

Though the valuation for this deal is yet to be disclosed (it is yet to clear regulatory and other approvals), marshalling the resources for this acquisition should not be too difficult. The company had about Rs 600 crore in short-term investments in March. The entire investment book was valued at about Rs 1,560 crore in March, translating roughly into Rs 70 per share. The prospects for the fertiliser business however, are far less exciting than those for chemicals. With raw material availability now secured, the phosphatic fertilisers business may deliver robust volume growth over the next couple of years, as the lag effect of a good monsoon kicks in.

The prospects for the urea business depend on the yet-to-be-announced policy dispensation for the final stage of the Group Pricing Scheme. With part of the domestic urea requirements now being met by imports, Tata Chemicals may have limited scope to ramp up volume sales in this business.

More Stories on : Stocks | Recommendation

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page