Expansion, several new launches to drive growth for Tata Chemicals

Declining energy costs coupled with price hikes should help the company's revenues and margins

Though the Tata Chemicals stock has corrected by a fourth since September last year and 10 per cent after a disappointing Q3, analysts see some respite from here on. The stock had gained almost three times in five years till September 2018, and the corrections are a good opportunity to take an exposure to the stock, say analysts.

The company’s core businesses of soda ash and salt generate more than 70 per cent of its operating profits and are seen as cash cows (particularly the Indian assets). There are expansions at its domestic facility in Mithapur, which will help it increase soda ash capacity by 20 per cent. The salt capacity would be 40 per cent higher over the next few years and is positive for the company. Though there are some near-term concerns on weak international soda ash realisations, however, these are already reflected in the stock prices. Further, the company is undertaking price hikes at the opportune time. Analysts at Reliance Securities say the company is hiking renegotiated soda ash contract prices in international contracts, which will help it improve margins from the current quarter onwards.

Analysts, however, are more optimistic about business transformation measures the company is taking, especially in segments such as speciality and consumer products which generate a higher return on capital. The expansion in salts, spices and pulses coupled with several new launches at regular interval would increase the company’s incremental revenue. The management also expects the pulses and spices to grow segment and be profitable by FY20.

 

The company is building its speciality business, too, which coupled with consumer business are being looked at as the future growth drivers. The new plants for silica and nutraceuticals are likely to come up on stream in a few quarters.

On the weak show in the past quarters, analysts at Motilal Oswal Securities say the company’s performance was dampened by multiple one-offs but there have been signs of revival with the softening of natural gas prices (15 per cent average sequential decline in the last four months) and an average price hike of $5 per million tonne for CY19. While they have cut forward estimates after the Q3 miss, they still see substantial upside to the stock prices from current valuations. Even analysts at Reliance Securities say that the recent price correction is overdone and valuations seem to be reasonable at current levels.