Buy Tata Chemicals Ltd For Target Rs.316 - HDFC Securities
A part of US$ 113 billion Tata Group, Tata Chemicals Ltd (TCL) is a leading multinational company employing over ~5000 people and present in 40+ countries, four continents with 13 manufacturing plants, supported by three R&D centers with 200+ experts. The company produced over 3,08,000 tonnes of salt in Q1FY21, over 25% more than the production in the same period last year. Demerger of Consumer products business to Tata Consumer Products Ltd (TCPL), has resulted in increasing contribution from the soda ash business, though TCL continues to manufacture salt for TCPL.
Although, the basic chemistry segment faced a sharp decline in volumes/margins during Q1FY21, it was partially offset by robust growth in the specialty products business. Change in the product mix towards high value products assisted Q1FY21 revenues. The realisation growth from India business was down 29.8% YoY to Rs 45,850/ton. The basic chemical revenues from the Europe region were also up by 2.9% YoY to Rs 316cr.
Geographically, Q1FY21 India performance was subdued on account of de-growth in flat glass segment soda ash/bicarb volumes and lower realization (27%/22% respectively). However, demand spur in the soaps & detergent industry was a breather, and is expected to continue post COVID. North America too witnessed a sharp decline in its revenue by 26.7%, due to drop in Flat Glass demand drop by 20% (exports/domestic volumes declined 45%/13% YoY), mainly due to adverse price impact of export sales. However, currency benefit of 9% led to an overall realization increase of 2% YoY (to Rs 15,995/mt). In UK, change in the sales mix led to a rise of 2.9% in revenue, and 86.7% in EBITDA with OPM rising from 4.9% to 8.9%. Port closures were only seen in the Southeast Asian market however, Q2 is expected to fare better than Q1. Next, UK operations did not suffer much, and Kenya did not see much of a disruption in its production either but still needs to recover.
Plants are now functioning in full swing in India, with Mambattu, Nellore (AP) and Cuddalore (TN) facilities being able to currently meet its customer requirements post the relaxations in local areas. Demand for Flat glass, which finds its application in the Real Estate and Auto sectors, remains muted, which could impact the near-term performance, if it fails to revive soon. However, wide application of soda ash in variety of industries, availability of limestone quarries, promoters increasing their stake, new product launches, and continuous relaxation measures taken by the government, especially the resumption of construction activities bodes well for the company.
Valuations and Recommendations:
We assign a P/E multiple of 9.5x FY22E EPS for base case fair value resulting in price of Rs299, and 10.0xFY22E EPS for bull case fair value resulting in price of Rs316. We feel investors can buy the stock on dips to RS.250-254 band (8.0xFY22E EPS) and add further on dips to Rs.219-223 band (7.0xFY22E EPS).
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