Ruchi AgrawalMoneycontrol Research
Tata Chemicals (TTCH) (CMP: Rs 574; mcap: Rs 14,680 crore) reported a decent performance in Q1, driven by a healthy show in the basic chemistry business with positive growth trends from Africa and the US. Europe operations remained under pressure.
The management is strategically working to increase the share of high margin specialty product portfolio and aims to bring it to 51 percent by FY25, from the current 20-30 percent. We believe this would help in boosting overall margins in the longer term.
Key highlights
- Revenue was up 5.6 percent year-on-year (YoY) driven majorly by a healthy show in the US (10 percent YoY) and Africa (32 percent).
- Price uptick, improved realisations and better volumes in the US, coupled with lower raw material costs and a favourable base in Africa, led to an expansion of 18 percent YoY in earnings before interest tax depreciation and amortisation (EBITDA) and 219 basis points (bps) in margin.
- Despite the price jump, the performance in Europe remained under strain, with weakness in EBITDA due to higher raw material, lower volumes and energy costs.
- Consumer segment revenue grew 13 percent YoY, with pulses and spices registering a growth of nearly 45 percent despite strong competition from regional brands and unorganised market. However, operating margin at 14.6 percent saw a 420 bps YoY drop.
- Specialty Products revenue grew 9 percent and segment margin expanded 40 bps to 11.9 percent.
- The quarter saw a YoY rise in overall employee, power and fuel costs by around 10 bps each.
- Sales volume in soda ash declined by 2.2 percent to 835,000 tonnes and bicarb volume was down at 50,000 vs 51,000 tonnes a year ago.
- Salt sales saw 5 percent YoY uptick in volumes at 2,98,000 mt (million tonnes). However, the margin saw some impact due to higher marketing costs and waste management expenses.
- At Rallis, a subsidiary of TTCH, revenue for the quarter was up 8.7 percent YoY, driven by an improved performance in the international segment, which rose almost 12 percent. Exports growth was mainly driven by Europe, followed by South America, North America and Africa. Domestic crop protection business remained soft due to challenging market conditions. The company looks to increase footprint in south-east Asian and African countries.
Other comments
- TTCH is at the final stage of commissioning the new nutraceuticals plant at Nellore and trail production is expected to start soon. It has plans to begin commercial production from the plant in the second half of the year.
- The company has received environmental clearances for the capacity expansion at Mithapur facility. TTCH is lining up $370 million capex towards raising soda-ash capacity by about 2,00,000 mt, salt production by 400,000 mt, and a chunk for upgrading turbines to reduce carbon footprint.
Outlook
The current quarterly performance has been encouraging. We believe that the demerger of the consumer business will help TTCH in deploying resources to expand the chemical portfolio towards high-margin products. The remaining business will be a pure-play chemistry focused entity for which the company has attractive plans to expand the specialty product business.
We see the near term to be capex intensive. The management has highlighted that the entire capex to be funded via internal accruals and we do not expect any substantial debt to enter the business. The benefits of the expansion would have some gestation period and might take some time before they start contributing positively to growth.
The stock has corrected substantially from its 52-week high and trades at a 2020e PE of 12x, which appears to be an interesting level to accumulate.
We expect a few more value unlocking opportunities like monetisation of cross-holdings in the near term. In the medium term, we believe that company’s plan for taking specialty product business share to 50 percent of sales could help in re-rating. In particular, Highly Dispersible Silica (HDS) and the lithium-ion battery business are the two key categories to watch out for.
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Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here
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