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Recovery in Soda Ash volumes drives NA and India business

Result above our estimate

* TTCH’s consolidated EBITDA was above our estimate, led by a strong volume recovery in North America and India. The strong performance was despite higher energy cost in India and the UK. In North America, the spot market in Soda Ash is witnessing a price recovery, and the contract market is expected to follow suit on renewals.

* Factoring its performance in 1QFY22, a faster volume recovery, and improved profitability in IMACID (JV of TTCH to manufacturer phosphoric acid), we have increased our FY22E PAT estimate by 54%. We have increased our FY23E PAT estimate by 8% as we had already built in a volume recovery earlier.

* On a one-year forward basis, TTCH has historically traded at an average EV/EBITDA of 10.2x/9.8x/8.7x in the last three/five/10 years. It is now trading at 11.4x FY22E EV/EBITDA, implying a premium of 12%/17%/32%. The recent performance in the stock price was on the back of TTCH’s intention to enter into EV Cell manufacturing, but it is yet to finalize its plans. Also, execution risk persists. So, we maintain our Neutral rating with a SoTP-based TP of INR810/share.

Increase in energy, logistics, and carbon cost cushioned by volume growth

* TTCH reported a revenue of INR29.8b (est. INR27.4b) in 1QFY22, up 27% YoY. EBITDA margin expanded by 490bp YoY to 20.2% (est. 15.1%). EBITDA rose 67% YoY to INR6b (est. INR4.1b). Adjusted PAT grew 21.7x YoY to INR2,880m (est. INR830m), aided by a lesser tax rate (22.6% v/s 32.3% in 1QFY21), lower interest cost (-31%), and higher profits from JV/associates.

* On a QoQ basis, revenue grew 13%, with EBITDA/adjusted PAT up 2.1x/24.5x.

* India standalone revenue grew 32% YoY to INR8.3b, with an EBITDA growth of 53% YoY to INR2.4b. This was on the back of volume growth of 42%/5% in Soda Ash/Salt, and blended realization improvement of 5%. Margin improved on higher volumes, partially impacted due to higher input and energy cost.

* In North America (NA), revenue grew by 35% YoY due to a 50% growth in volumes (exports/domestic volumes rose by 129%/4%). Realization fell 7% to USD196/mt. There was a currency impact of 3% YoY. Reported EBITDA/mt grew 239% to USD40, with EBITDA growing 4.9x to INR1,730m due to: i) improvement in volumes, and ii) lower royalty expense. The spot market is witnessing a price recovery, and the contract market is expected to follow suit on renewals.

* In Europe, revenue grew 29% YoY due to an improvement in blended realization (+14% in GBP), currency benefit (+10% YoY), and 3% growth in sales volume. However, EBITDA growth came in lower at 4% YoY due to lower sales realization, higher energy, and increasing carbon costs.

* Soda Ash volumes in Africa grew 46%. Realizations (in USD terms) declined by 5% YoY. There was a currency impact of 3% YoY. This led to a revenue growth of 34% YoY. EBITDA rose 2.5x YoY to INR250m due to lower power and fuel cost.

* Revenue from Rallis India grew 12% YoY, backed by volume growth in Domestic Formulations, Crop Care, and Seeds. However, EBITDA declined by 2% YoY due to higher freight and employee cost.

Highlights from the management commentary

* Post the de-bottlenecking project in NA, Soda Ash capacity is expected to increase by 180,000-200,000MT.

* Capex: The company is incurring a capex of INR27b at its Mithapur plant. Of this, INR9.5b has already been incurred and the balance would be spent till FY24.

* The movement in carbon prices is expected to increase the cost by GBP1-2m per quarter in the UK business.

* The three key priorities of TTCH: i) invest and grow in India, ii) focus on cash generation across geographies, and (iii) deleveraging its international debt.

Valuation and view

* In the last six months, TTCH has rallied ~50% on the back of the PLI incentive announced by the GoI for the EV Battery business. TTCH intends to enter into EV Cell manufacturing, but its plans are yet to be finalized. The same was highlighted by the management during the post earnings conference call.

* On a one-year forward basis, TTCH has historically traded at an average EV/EBITDA of 10.2x/9.8x/8.7x in the last three/five/10 years. It is now trading at 11.4x FY22E EV/EBITDA, implying a premium of 12%/17%/32%. TTCH’s past multiples factor in earnings from the Branded Consumer business (Salt and other Consumer sales), which commands a higher multiple as compared to its existing Chemicals business. Thus, the implied premium would further widen.

* Execution risk in the Energy Science business persists and compounding it is the risk of margin pressure due to increasing RM prices, particularly energy cost in Soda Ash, which poses a near term risk.

* Factoring its performance in 1QFY22, a faster volume recovery, and improved profitability in IMACID (JV of TTCH to manufacturer phosphoric acid), we have increased our FY22E PAT estimate by 54%. We have increased our FY23E PAT estimate by 8% as we had already built in a volume recovery earlier.

* We maintain our Neutral rating with a SoTP-based TP of INR810/share.

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