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Better soda ash prices to support growth ahead…

About the stock: Commencing operations in 1944, Tata Chemicals has come a long way to become one of the top five players in the global soda ash market.

* Under basic chemical, TCL offers soda ash, soda bicarbonate, cement, salt, marine chemicals and crushed refined soda, while speciality chemical consists solution towards agro chemical through Rallis and other specialty solutions such as nutritional products and HDS

* Basic chemical forms 75% of overall revenue while the rest comes from speciality products

Q2FY22 Results: Lower growth from India and operational loss from Europe dragged operational growth below our expectations.

* Reported revenue growth of 16% YoY to | 3022.6 crore, led by higher growth in the basic chemical segment across four units

* Gross margins expanded 470 bps YoY to ~77.1% while EBITDA margin improved 177 bps YoY to 16.6%, impacted by higher power & fuel cost (up 49% YoY)

* EBITDA was up 30% YoY to | 500.9 crore

* Adjusting exceptional expenses to the tune of | 11 crore, adjusted PAT was up 197% YoY to | 209.3 crore

What should investors do? The stock appreciated at 79% CAGR in last two years

* We revise our rating from HOLD to BUY on the back of better soda ash realisation visibility on the back of favourable demand outlook

Target Price and Valuation: We value Tata Chemicals at SOTP valuation to arrive at a revised target price of | 1035/share (earlier | 925/share).

Key triggers for future price performance:

* Improvement in the soda ash pricing environment bodes well for future growth outlook

* Revival in export demand for North America unit to sustain group performance

* Higher share of speciality business to command better valuations for the overall group

Alternate Stock Idea: Apart from Tata Chemicals, in our chemical coverage we also like Neogen Chemical

* Trigger for Neogen Chemical’s future revenue growth would be increasing CRAMS opportunity

* BUY with a target price of | 1515

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