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Adverse demand-supply scenario of soda ash hurts result

Operating performance misses our expectations

* Tata Chemicals (TTCH)’s 3QFY24 consolidated EBITDA declined 41% YoY, primarily due to a subdued operating performance across geographies with India/US/UK/Kenya reporting 27%/56%/62%/55% decline YoY.

* We cut our FY24/FY25/FY26 EBITDA estimates by 11%/11%/5% due to unfavorable demand-supply dynamics persisting in the global soda ash industry and continued pricing pressure across regions. We reiterate our Neutral rating with an SoTP-based TP of INR900.

Weak operating performance because of subdued soda ash prices

* TTCH reported overall revenue of INR37.3b (est. INR38.2b) in 3QFY24, down 10% YoY. EBITDA margin contracted 770bp YoY to 14.5% (est. 20.1%) due to adverse operating leverage; EBITDA of INR5.4b (est. INR7.7b) was down 41% YoY. Adjusted PAT dipped 60% YoY to INR1.6b (est. INR2.5b) due to higher interest costs (up 23% YoY) and a higher effective tax rate (33.7% in 3QFY24 v/s ~16.5% in 3QFY23).

* Basic Chemistry products’ revenue declined 11% YoY to INR31b. Its EBIT margin contracted 10.9pp YoY to 10.5%, while EBIT declined 56% YoY to INR3.3b. Specialty products’ revenue declined 7% YoY to INR6.3b. Its EBIT margin rose 50bp YoY to 2.7%, while EBIT grew 13% YoY to INR170m.

* For India, the standalone/TCNA/TCEHL/TCAHL/Rallis revenue declined 10%/ 5%/20%/32%/5% YoY to INR10.9b/INR12.6b/ INR5.9b/INR1.6/INR6b. EBITDA margins for India Standalone/TCNA/TCEHL/TCAHL contracted 450bp/ 1,310bp/1,070bp/1,710bp YoY to 18.8%/11.5%/9.6%/34.4%, while the same for Rallis improved 170bp YoY to 10.2% during the quarter.

* For 9MFY24, revenue/EBITDA/Adjusted PAT declined 4%/16%/36% YoY to INR119.5b/INR24b/INR10.3b.

*  Gross/Net debt stood at ~INR59.1b/INR43.8b as of Dec’23 (vs. ~INR63b/ INR39b as of Mar’23).

Highlights from the management commentary

* Demand outlook: Market demand remains tepid across all key regions and segments. The current demand-supply situation is likely to persist in the short to medium term.

* India business: TTCH is expecting stable to slightly better performance from India operations on a sequential basis. The new soda ash plant (250KTPA) is expected to be commissioned by May’24, taking the total capacity in the region to over 1MTPA.

* TCNA: US volumes were lower by 80,000 MT due to plant shutdowns and rail car shortage. The Impact of the same was ~USD10m, with a contribution margin of USD125-130/MT. Adjusting for the same the EBITDA/MT would have been ~USD45 v/s reported USD33. While export contracts have seen sharp erosion, the contribution is expected to be down by ~USD100 in the coming quarter.

Valuation and view

* There are certain short-term challenges in the soda ash demand-supply dynamics owing to weak demand in Western Europe, resulting in suppliers (majorly from Turkey) exporting soda ash beyond Europe (impacting global prices adversely). However, the situation is expected to balance out in the medium term with the emergence of new applications, such as solar glass and lithium-ion batteries.

 * We cut our FY24/FY25/FY26 EBITDA estimates by 11%/11%/5% due to unfavorable demand-supply dynamics persisting in the global soda ash industry and continued pricing pressure across regions. We reiterate our Neutral rating with an SoTP-based TP of INR900.

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