Tata Chemicals strong Q2 performance make it a BUY with a target of Rs 510/-

Second quarter in a row Tata Chemicals ’ has reported good numbers.  The Q2 consolidated net profit jumped 92 percent to Rs 257 crore from Rs 134 crore in the year-ago period. The company’s net sales were up 10 percent to Rs 4,742 crore from Rs 4,282 crore year-on-year. Its operating profit (EBITDA) was up by 15 percent to Rs 592 crore from Rs 513 crore and EBITDA margin expanded by 50 basis points to 12.5 percent versus 12 percent, Y-o-Y.  This is particularly heartening as the company had been reeling from bad domestic markets and their international ventures doing badly hitting profitability.

The company with a market capitalisation of  ~10,788 (rs cr) is mainly into salt, soda ash and fertilisers.  It has operations across India, UK, Kenya and North America.  On the domestic front the soda ash business has been doing well, this is expected to do well going ahead as well.  The fertiliser business which is the larger contributor  has also been showing signs of revival and this is expected to improve over the next year.  The UK/Kenya piece has been a drag and is expected to show a turnaround in the next two years.  North America has been a steady performer and continues to be so.

The real cushion for the stock is the investments it has in other Tata Group companies and  their holding in the parent Tata Sons.

The management remains pretty confident of a turnaround in UK/Kenya operations‐ while Kenya is likely to see a steady state performance from Q3FY15E, UK business will see steady state performance from Q3FY16E once the steam turbine is implemented.

 As per CMIE, demand for soda ash is likely to grow by 3% p.a. over the medium term. Capacity additions are likely to remain low,  

But the real deal will be when Tata Chemicals will get a fair valuation – if you do a SOTP valuation for its investments and its value for each of its businesses giving an FMCG valuation to the salt business you would get a target price closer to Rs 600/-, but let me be conservative and value it on a P/E basis and give it a target of Rs 510/- which is 14X is FY16E EPS.

 

Comments

  • i bought futures one lot at 455.90 expiring jan 29 2015…please advice what may be stop loss for tata chemicals and what may be target..by contract expiry…thanks

    anonymousDecember 10, 2014
    • I do not advise on F and O positions sorry, thanks for writing in

      Sharmila JoshiApril 8, 2015
  • Hello Mam,
    Is it still suggestible to buy TATA Chemicals?

    Thanks,
    RK

    RamDecember 14, 2014
    • My target is Rs 500 so I think Tata Chem is a good buy

      Sharmila JoshiApril 8, 2015
    • My target is Rs 500/-

      Sharmila JoshiApril 8, 2015

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