Buy Tata Chemicals Ltd For Target Rs.. 1,110 - Motilal Oswal Financial Services Ltd
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Operating performance in line with our expectations
* TTCH’s consolidate EBITDA grew 47%, primarily led by higher realization per MT in the US (up 38% YoY/25% QoQ) and the UK (up 54% YoY/down 2% QoQ). Consequently, EBITDA/MT improved in the US by 52% YoY to USD91 and in the UK by 6.9x YoY to GBP144, aided by cost moderation and high realization.
* Factoring in a strong 4QFY23 performance in the US and the UK region, we raise our FY24/FY25 EBITDA estimates by 14%/11%. We reiterate our Neutral rating with an SoTP-based TP of INR1,110.
Strong EBITDA/MT in US and UK drives operating performance
* TTCH reported total revenue of INR44.1b (est. INR44.6b) in 4QFY23, up 27% YoY. EBITDA margin expanded 300bp YoY to 21.9% (est. 22.5%) due to lower raw material costs, employee expenses, and power & fuel expenses as a percentage of sales. EBITDA stood at INR9.65b (est. INR10b), up 47% YoY. Adj. PAT was up 54% YoY at INR7.1b (est. INR5b).
* Basic Chemistry revenue/EBIT grew 32%/70% YoY to INR38.2b/INR8.8b and EBIT margins expanded 520bp YoY/160bp QoQ to 22.9%. Specialty Products revenue grew 4% YoY to INR5.9b and the operating loss widened to INR930m from INR240m in 4QFY22.
* For India standalone/TCNA/TCEHL/TCAHL, revenue rose 17%/51%/23%/22% YoY to INR13b/INR16.5b/INR7.1b/INR2.1b, while EBITDA margins were down 5pp/up 2.5pp/up 24.7pp/up 8.7pp at 19.9%/27.7%/31.8%/43.8%, led by better realizations and a stable cost environment.
* For FY23, revenue/EBIDTA/Adj. PAT increased 33%/66%/85% YoY INR168b/ INR38.2b/INR23.4b. Net debt as of Mar’23 stood at ~INR39b, down 6% from Mar’22, primarily due to the prepayment of debt USD155m in overseas units during the year (INR12.5b).
Highlights from the management commentary
* Soda ash demand would remain balanced in the medium term, led by demand growth (2-6%) outpacing supply growth. China’s reopening is a key demand driver for new applications such as solar glass and lithium-ion batteries. However, Mongolia capacity (~1.5MMT) would absorb some domestic demand in China in coming years.
* Debt Repayment: TTCH is expected to repay USD200-250m of debt in FY24.
* Margin outlook: The US will drive the company’s growth, with margins expected to further improve marginally. UK margin is expected to moderate with a shift toward the fixed-margin model. Kenya and India would sustain the current margin and witness some improvement in 2QFY24 with further cost moderation.
* Capacity Addition: The additional soda ash capacity of 185kt in India is expected to come on stream in H2FY24. In the US, the capacity expansion of 400kt through debottlenecking is in the planning stage.
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