Global chemistry

Tata Chemicals' global venture is likely to add fresh fizz to its near-perfect business mixture.

With its presence in the highly controlled fertiliser sector and the need to grow its stable soda ash business, Tata Chemicals now plans to grow overseas.

While joint venture with Moroccan player Indo Maroc Phosphore (IMACID) is helping the company to source cheaper raw materials, the acquisition of UK-based Brunner Mond will give Tata Chemicals presence across international markets in three continents.

Tata Chemicals is a major chemical and fertiliser manufacturer in the domestic market. The fertiliser segment contributes 60 per cent of Tata Chemicals' revenues.

The company is a market leader in soda ash and salt segments, the main products of its inorganic chemicals segment that chip in 40 per cent of the turnover.

Betting on global soda ash
Soda ash is a multi-purpose chemical used mainly in glass and detergent industries. Tata Chemicals garners 20 per cent revenues from the segment and boasts of a 33 per cent market share in domestic markets.

Its 0.87 million tonne Mithapur plant makes synthetic soda ash and is the most integrated manufacturing unit in South Asia. It enjoys locational benefits due to salt pans and limestone quarries in its vicinity.

Domestic demand for soda ash will grow at around 5 per cent over the next few years. In addition, Tata Chemicals plans to capture a sizable chunk of the global soda ash market through its acquisition of Brunner Mond.

In the second half of FY06, Tata Chemicals acquired Brunner Mond along with its Kenyan subsidiary Magadi Soda and Netherlands subsidiary for Rs 798 crore, to become the world's third largest soda ash maker and gain access to markets across three continents.

After the acquisition, the combined soda ash production capacity has gone up to 3 million tonne a year and Tata Chemicals expects a 40 per cent jump in its consolidated revenues after Brunner Mond is completely integrated.

Analysts expect Brunner Mond to add Rs 110 crore to the company's profits from FY08. The Magadi plant produces natural soda ash which costs half of synthetic soda ash. Tata Chemicals will increase capacity in this plant by December 2006 and the expansion will bring a new fillip to the earnings.

Handle on inputs
Tata Chemicals has presence across all agro nutrients like nitrogen (N), phosphorous (P) and potassium (K). Its energy efficient Babrala plant produces urea, which contributes 20 per cent to revenues.

The demand for urea will remain strong however prices are likely to be stable and volumes would drive growth.

The Haldia plant makes diammonium phosphate (DAP) and complex NPK fertilisers that need inputs like potassium and phosphorous which are scarce in India.

Most phosphatic fertiliser plants in India run at low capacities due to scarcity of raw materials. However, Tata Chemicals made timely investment in a joint venture with IMACID which helps it to source phosphoric acid, a key raw material for its Haldia operations at competitive prices.

Moreover, the company may get headway into African markets through this phosphatic chemicals company.

Coke and coal are major inputs for the chemical business and with their stable prices, input costs should not be a concern in the short run.

Though the soda ash business is cyclical in nature, the outlook is positive over the medium term. On the other hand, fertiliser sales are dependent on monsoons, so there could be some intermediate hiccups for Tata Chemicals.

Brand power
'Tata Namak' is the leader in the branded salt domestic market with a share of 40 per cent and chips in 9 per cent to the company's turnover. The branded salt market is expected to grow at 4 per cent and Tata Chemicals will continue to enjoy an edge over other players given its strong brand presence.

Tata Chemicals also makes cement under the 'Tata Shudh' brand name. This plant is quite small with a capacity of around 0.5 million tonnes, and caters only to the Gujarat market.

With the ongoing construction boom and stable cement prices, revenues from the segment may see some upside, but with a contribution of just 4 per cent to FY06 revenues, cement is unlikely to impact the company's profitability.

The company makes sodium tripolyphosphate (STPP) which is used as a builder in washing powders and is targeted at the higher end of fabric wash markets. In FY06, STPP sales registered a modest growth but margins were under pressure due to Chinese imports.

Stable growth
The company came out with good Q2 results due to higher fertiliser sales and other income thanks to dividend from Tata Industries.

In H1 FY07, standalone sales registered a y-o-y rise of 25 per cent to Rs 1883.43 crore. The operating profits increased by 11.7 per cent and net profits jumped by 21 per cent to Rs 233 crore. In FY06, the consolidated revenues and net profits stood at Rs 4029 crore and 428 crore during the same period. 
 

POSITIVE REACTION
(Rs crore)	H1 FY07	FY06	FY05
Net sales	1883.43	3517.48	3008.14
Y-o-Y growth (%)	25.02	16.93	18.24
Operating profit	334.97	577.34	513.47
Y-o-Y growth (%)	11.73	12.44	15.64
OPM (%)	17.79	16.41	17.07
Net profit	233.00	356.32	341.87
Y-o-Y growth (%)	21.38	4.23	47.87
NPM (%)	12.37	10.13	11.36

At the current market price of Rs 231, the stock trades at reasonable valuations of 14 times its FY06 earnings. The valuations stand at 12.3 and 12 times the FY07 and FY08 earnings estimates of Rs 18.7 and Rs 19.2 respectively.

Tata Chemicals also has huge investments in Tata group's listed and unlisted entities. It also has substantial cash and investments in marketable securities which add substantial value to the company.

Though analysts don't see any short term earnings momentum in the stock, they feel that Brunner Mond will bring substantial gains from FY08.

Surinder Singh, analyst, Anand Rathi Securities, says, "Tata Chemicals is available at decent valuations and is a good bet for investors looking for less risky and stable gains."