News Analysis

Tata Chemicals stock up 10 per cent on the back of FY22 results and demand visibility

Sai Prabhakar Yadavalli |BL Research Bureau | Updated on: May 02, 2022

Demand-supply mismatch in soda ash and pricing power aid revenue and profit growth

The Tata Chemicals stock rose 10 per cent on Monday, following good results on Friday, released after market hours. Tata Chemicals continues to gain from recovery of demand to pre-pandemic levels in its products seeing a volume growth of 14 per cent in FY22 across soda ash, sodium bicarbonate and salt.

The consolidated revenue growth of 24 per cent to ₹12,622 crore in the period points to a pricing growth of around 10 per cent. According to the company, global demand-supply mismatch in soda ash, wherein demand exceeds supply by around 3-5 per cent, is allowing the company to pass on the higher raw material prices efficiently. With no immediate visibility of new capacity worldwide, the company expects excess demand to persist for 18-24 months at least — the period it takes to commercialise a new plant. The recovery of demand and pricing power have helped the EBITDA margin touch 18.3 per cent in FY22. This is a 350-bps improvement over the last year. This has aided net profit at the consolidated level to jump five times to ₹1,252 crore in FY22.

The ability of the end-users (glass making, detergents, food additives, pharmaceuticals, and construction) to maintain demand in the current inflationary period will be the key monitorable, according to the company. But the diverse end-user group and the basic commodity nature of the products, should find competing applications. The management comments that in the recent history, a peak dip of 6-8 per cent in global demand was witnessed only twice, once during the global financial crisis and the other, following the Covid pandemic.

Capex plan

The company is in the second phase of the ₹2,600-crore capex plan, which will increase the capacity of existing products. The board has cleared a plan to invest another ₹2,000 crore for capex. Tata Chemicals has developed, on a pilot scale, silica for sustainable automobile tyre applications and other nutraceutical applications. The capacity for the same will also be addressed by the new round of capex.

Tata Chemicals is trading at 16.7 times one-year forward earnings on rolling over to FY24 earnings (Bloomberg Consensus), in line with its re-rated valuation post-pandemic. We reiterate our ‘accumulate’ call given in February.

Published on May 02, 2022
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