Improving business outlook triggers rally in Tata Chemicals

Demand revival for soda ash and capacity expansion fuel optimism, say experts

Shares of Tata Chemicals have risen about 30 per cent this month after analysts upgraded earnings estimates to factor in improving outlook after the good December quarter (Q3) results. Though Q3 saw a decline in earnings, analysts take heart from the fact that it was ahead of estimates and recovery was better than anticipated. 

Net sales were flat at Rs 2,606 crore, while net profit declined 4 per cent over the previous year to Rs 161 crore, compared with the Street’s expectation of Rs 2,530 crore and Rs 101 crore, respectively. 

It was on the operational front that the firm reported a strong beat. Earnings before interest, tax, depreciation and amortisation (Ebitda) remain­ed steady at Rs 472 crore, compared with expectation of a decline to Rs 400 crore. However, Repor­ted Ebitda includes a one-off insurance gain of Rs 27 crore in Q3FY21. Even on an adjusted basis, though, the Ebitda performance was higher than expectations. Margins, thus, came in higher at 18.1 per cent in Q3, versus estimates of 15.7 per cent.

Analysts at IIFL securities say Q4 should mark a return to near-normalcy and forecast sharp growth in earnings from FY22. This is likely to be driven by a gradual improvement in soda ash volumes as demand from end-user industries like construction and autos picks up. “Further, the inventory situation in China is also getting normalised, largely on the back of decent growth in demand for float and solar glass, which should support demand/supply of the global soda ash market,” said Mitesh Shah, research analyst at ICICI Securities. 

The company also plans to spend Rs 2,400 crore towards capacity expansion projects at its Mithapur plant. Of this, around Rs 800 crore has been spent and the rest will be incurred over the next two years. This is estimated to add Rs 1,400 crore in revenue and Rs 600 crore in Ebit by FY25, according to the management.

In this backdrop, analysts at Motilal Oswal Securities have increased their earnings estimate by 20 per cent for FY21 and by 12 per cent each for FY22 and FY23. However, analysts note that the recent run-up in the stock does not offer an attractive entry. Investors are, therefore, advi­sed to accumulate the stock after a healthy correction.