Tata Chemicals

Tata Chemicals
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs535
Current market price: Rs411

Riding on uptrend in soda ash cycle

Key points

• Soda ash prices up by 60%: Tata Chemicals Ltd (TCL), the third largest producer of soda ash in the world, is set to benefit from the upturn in the soda ash cycle. A worldwide shortage of soda ash has pushed its prices up by 60% to $260-300 per tonne in the last six months. Since the supply of soda ash is expected to remain tight, its prices would stay firm going forward.
• Soda ash capacity addition to lead to volume growth: TCL has recently added 365,000tpa of capacity at its Kenyan (Magadi) plant, which is the lowest cost producer of soda ash in the world. It is also planning to raise its Magadi capacity by another 365,000tpa to 1.1mmtpa by FY2011. It has also undertaken the debottlenecking of its Mithapur plant to raise the latter's capacity from 0.9mmtpa to 1.2mmtpa by FY2011.
• Windfall profits awaiting de-bottlenecking of urea capacity: After the de-bottlenecking of the urea capacity to 1.2mmtpa by September 2008, the normative capacity utilisation would reach 145%. This would generate windfall profits for the company till capacity re-rating takes place in FY2011.
• IMACID JV to benefit from higher prices of phosphoric acid: Higher phosphoric acid prices due to a shortage coupled with a better pricing policy would further improve the profit margins for the IMACID joint venture.
• Investment portfolio worth Rs187 per share: TCL's investment portfolio of Rs775 crore (book value) is worth Rs4,600 crore, which works out to Rs187 per share.
• Valuation: At the current market price of Rs411, the stock is trading at 13.5x its FY2009E diluted earnings and an EV/EBIDTA of 6.6x. We value TCL's core business at 14.4x its FY2009E diluted earnings and investments at Rs94.8 per share after discounting 50% of their fair value. We recommend Buy on the stock with a price target of Rs535.