Neutral Tata Chemicals Ltd for the Target Rs. 870 by Motilal Oswal Financial Services Ltd
Lower realization continues to hurt margins
Operating performance below our expectations
* Tata Chemicals (TTCH)’s 4QFY25 consolidated EBITDA declined 26% YoY/25% QoQ due to lower realizations and unfavorable operating leverage across geographies. Revenue remained flat YoY due to flattish volume (higher volumes in India and Kenya offset by lower volumes in the US and UK).
* With a challenging FY25 led by the pricing impact and shutdown of the UK (Lostock) soda ash facility, management guided an improving scenario for FY26, particularly for India, Kenya, and the domestic US business. While the UK business (consisting of a new pharma salt business) is expected to improve from 2QFY26, the US export market will remain a challenge, led by declining export realization.
* Factoring in the weak 4Q/FY25 performance, closure of the Lostock plant in the UK (~8% of total revenue in FY24), and continued pressure on realization, we cut our FY26/FY27 EBITDA estimates by 11%/6%. Reiterate Neutral with an SoTP-based TP of INR870.
India and Kenya’s businesses continue to outperform other markets
* TTCH reported a total revenue of INR35.1b (est. INR36.9b) in 4QFY25, flat YoY, due to flat volume growth (soda ash/bicarb volume remained flat; salt declined 7% YoY). EBITDA margin dipped 340bp YoY to 9.3% (est. 13.7%), led by lower realization. EBITDA stood at INR3.3b (est. INR5.0b), down 26% YoY.
* TTCH reported an adj. net loss of INR328m (est. adj. PAT at ~INR1.4b) vs. an adj. net loss of ~INR1b in 4QFY24. An exceptional loss of INR550m was recognized as expenses related to the plant shutdown in Lostock, UK, amid sustained underperformance.
* Basic Chemistry product revenue was flat YoY at INR30.4b. EBIT stood at INR840m (vs. an operating loss of INR6.8b in 4QFY24). EBIT margin was 2.8%.
* Specialty products business was flat YoY at INR4.7b, and operating loss stood at INR630m (vs. an operating loss of INR390m in 4QFY24).
* India standalone/TCAHL’s revenue grew ~12%/8% YoY to INR12.2b/INR1.6b, while TCNA/Rallis remained flat YoY at INR13.2b/INR4.3b. TCEHL’s revenue declined 25% YoY to INR4.2b.
* EBITDA for India standalone/TCAHL grew 20%/136% to INR2.3b/INR530m, while the same for TCNA declined 46% YoY to INR800m. TCEHL/Rallis posted an operating loss of INR280m/INR180m vs. EBITDA of INR690m/INR70m in 4QFY24.
* EBITDA/MT of TCNA declined 44% YoY to ~USD15.7, while for TCAHL it grew 14% YoY to USD84. EBITDA margin for India Standalone expanded 130bp YoY to 18.9%.
* Gross/net debt stood at ~INR70.7b/INR55b as of Mar’24 (vs. ~INR55.6b/INR41.6b as of Mar’24).
* For FY25, revenue/EBITDA/Adj PAT declined 3%/31%/68% YoY to INR148.9b/INR19.5b/INR3.0b.
Highlights from the management commentary
* Demand & supply scenario: Global demand in FY25 surged, led by China (+18%) and India (+4%), while other regions declined ~3%. China’s growth was driven by the solar and battery sectors, but it is expected to stabilize. India's demand growth is expected to remain healthy at 5-6% going forward. Supply rose 8.9% YoY, led by China. Inner Mongolia’s capacity ramped up, which was offset by demand growth; hence, there were no exports from China.
* European business: The UK volumes were lower due to soda ash capacity shutdown and INR550m exceptional cost at Lostock. The business would shift toward value-added pharma salt. Ramp-up from 2QFY26 to aid profitability; 1QFY26 may see some impact.
* Capex: FY25 capex was INR20.05b. TTCH is calibrating its capex with lower outflow expected in FY26 to INR5.5–6b (this includes INR600m for Kenya’s 50KMT capacity). No major expansion beyond this, except INR180m for the FOS prebiotic plant. Full utilization of India’s soda ash and bicarb capacity is expected in FY26. Depreciation run rate to stabilize at 4QFY25 level.
Valuation and view
* TTCH faces near-term headwinds from weak demand in the US export market and Europe, and margin pressure due to falling soda ash prices. However, its strategic focus on specialty products and capacity expansions positions it well for long-term growth once global demand recovers.
* We expect TTCH to see volume and margin recovery in FY26, led by the India and Kenya markets (which are still better placed than other geographies). Further, cost optimization measures are expected to aid in margin recovery.
* We expect revenue/EBITDA/Adj. PAT CAGR of 5%/27%/2.2x over FY25-27 (2%/3%/15% over FY24-27). We reiterate our Neutral rating with an SoTPbased TP of INR870.
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