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Revival in end user demand to drive growth…

About the stock: Commencing operation 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.

Q1FY22 Results: Topline was marginally above but margins beat primarily due to lower-than-expected power & fuel and freight cost.

* Reported revenue growth of 26.8% YoY to | 2977.2 crore, led by higher growth in the basic chemical segment across four units

* Gross margins expanded 330 bps YoY to ~78.1% while EBITDA margin improved 490 bps YoY to 20.2 due to operating leverage

* EBITDA was up 67% YoY to | 601.2 crore

* PAT was at | 288 crore against | 13.3 crore in Q1FY21. The growth was largely due to strong operational performance and higher share from JV.

What should investors do?

The stock appreciated at 79% CAGR in last two years

* We retain HOLD rating on the back of better growth outlook of base business due to revival in the flat glass demand

Target Price and Valuation: We value Tata Chemicals at SOTP valuation to arrive at a revised target price of | 925/share (earlier | 750/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 | 1085

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