Tata Chemicals: Buy - take exposure in the stock

Tata Chemicals: Buy

Healthy investment book
Growth opportunities in the soda ash and cement businesses
Higher offtake in the fertiliser business

Investors can consider taking exposure in the Tata Chemicals stock, which trades at about 15 times its standalone earnings for FY-06. Buoyed by an upturn in its soda ash and cement businesses, the company's inorganic chemicals division recorded a spurt in revenue and earnings in recent quarters. The uptrend in the soda ash and cement businesses is expected to continue in the medium term, bolstering earnings growth. The Brunner Mond acquisition enhances growth opportunities in the soda ash business. However, volumes are likely to be higher in the fertiliser business.

Soda ash

Soda ash contributes 20 per cent of Tata Chemicals' standalone revenues. The company caters to a wide spectrum of the user industry as it makes a variety of grades. Growth opportunities in the realty space are likely to bolster demand for float glass. This, in turn, is likely to result in volume growth for the soda ash industry as the float glass sector is among the major consumers of dense soda ash. Tata Chemicals, which is among the larger manufacturers of dense soda ash, is poised to tap this growth opportunity. Growth in the automotive glass sector is likely to contribute to better offtake.

The buoyant trend in the steel industry is also likely to heighten the demand for soda ash. Higher offtake for detergents on the back of rising rural incomes, is likely to have a spin-off effect on light soda ash. The expansion in the paper industry, which is also among the larger consumers of soda ash, is likely to translate into higher volumes for the soda ash industry.
Rising prices of soda ash in the domestic market are likely to improve margins for Tata Chemicals. This trend may continue in the medium term, as there are only a few players in this business. The global situation also provides comfort with FMC Wyoming Corporation of the US having raised prices by 10 per cent with effect from July after a similar hike in October 2005. Rising global prices reduces the threat of imports; however, declining prices of caustic soda — an alternative to soda ash — are a cause for concern.

Brunner Mond

The acquisition of Brunner Mond has propelled Tata Chemicals into the league of global soda ash majors. With this acquisition, Tata Chemicals' soda ash business is expected to contribute about 50 per cent of its consolidated revenues. The Brunner Mond Group has manufacturing facilities in the UK, the Netherlands and Kenya with a capacity of 16 lakh tonnes, 45 per cent of which is for making dense soda ash,which has better realisations.

With Brunner Mond under its belt, Tata Chemicals has access to the markets of Europe, Africa, Pakistan and the Asean region and better reach to West Asia. The acquisition also gives Tata Chemicals access to the natural soda ash process, which is cost-competitive.

Tata Chemicals plans to leverage this competitiveness by doubling the capacity of its Kenyan facility to about 7lakh tonnes at a cost of about $100 million (about Rs 450 crore). Kenya is among the key players in the natural soda ash business, next only in size to the US. The acquisition has also enhanced Tata Chemicals' sodium bicarbonate capacity to about 2.25 lakh tonnes.

Brunner Mond's European sodium bicarbonate business caters mainly to the pharmaceutical sector. The company plans to tap Brunner Mond's cost-reduction strategies in the soda ash business and technology in the sodium bicarbonate segment, besides increasing the salt business of its Kenyan operations.

Fertilisers

Tata Chemicals' fertiliser division contributes about 60 per cent of its standalone revenues. The prospects of the fertiliser business depend largely on Government policy.

Abundant rainfall and healthy water storage levels across the country are likely to result in higher offtake for its fertiliser business. To ensure availability of phosphoric acid, Tata Chemicals acquired a 33 per cent stake in IMACID, which was earlier a 50:50 joint venture between the Kingdom of Morocco and Chambal Fertilisers and Chemicals.

Food and other businesses

Tata Chemicals, at its domestic facility, also manufactures sodium bicarbonate, cement and caustic soda and chlorine, sodium tri-polyphosphate (STPP), cooking soda and iodised salt. Though these businesses play a smaller role on the revenues front, they provide Tata Chemicals with sizeable cash flows. Volumes are expected to better for STPP, an active ingredient in detergents.

Growth in the realty and infrastructure space would provide volumes for cement; consolidation in the sector would help firm up prices. The caustic soda business is likely to face margin pressure in the medium term with global prices on the decline since December.
Investment book Tata Chemicals' sizeable investment book provides cushion against downside risk. The company would be among the key beneficiaries, should the Tata group decide to unlock its intra-group holdings.