Tata Chem soars 15% in 5 days, nears 52-wk high as Fitch revises outlook

Fitch Ratings has revised the outlook on TCL's long-term foreign-currency Issuer default rating (IDR) to 'Stable' from 'Positive'

Shares of Tata Chemicals (TCL) moved higher by 2 per cent to Rs 1,085, bouncing back nearly 4 per cent from its low of Rs 1,047.10, on the BSE in Wednesday's intraday trade amid heavy volumes in an otherwise a weak market. It was trading close to its 52-week high of Rs 1,140.95 touched on January 5, 2024.

The stock of the Tata Group commodity chemicals company is trading higher for a fifth straight trading day, and has rallied 15 per cent during the period, after Fitch Ratings revised the outlook on TCL's long-term foreign-currency Issuer default rating (IDR) to 'Stable' from 'Positive' and affirmed the rating at 'BB+'.

At 12:10 pm, TCL was quoting 1.9 per cent higher at Rs 1,081.90, as compared to 0.41 per cent decline in the S&P BSE Sensex. Average trading volume on the counter more than doubled with a combined 3.5 million equity shares changing hands on the NSE and BSE till then.

The demand environment for soda ash in domestic markets as well as international markets was challenging during the past quarter. This was especially so in the container glass and flat glass sectors in Europe & Americas, which lead to a pressure on volumes and price.

In the short term, the current demand–supply situation is likely to persist but should improve and stabilise over the long term driven by growth sectors based on sustainability trends, the management said.

TCL is the world's third-largest soda ash producer. Its soda ash capacity in the US and Kenya (64 per cent of total capacity) benefits from natural trona deposits, which require low conversion costs.

TCL's capacity in Gujarat, India (24 per cent of total) costs one of the lowest among synthetic soda ash producers, aided by proximity to limestone quarries, economies of scale, and an integrated cement plant utilising waste generated from soda-ash manufacturing. These underpin the company's cost competitiveness relative to peers.

Fitch Ratings expect TCL's Ebitda (earnings before interest, taxes, depreciation, and amortisation) net leverage to average 2.2x over FY25-FY27 and be commensurate for its rating, driving the 'Stable' Outlook, despite the near-term industry pressures.

"The Outlook revision follows our view that the global soda ash industry will remain oversupplied for longer than we previously anticipated," Fitch Ratings said in its rationale on February 29.

Demand in Europe (particularly the glass segment) has been weaker than expected in the financial year ending March 2024 (FY24) so far, leading Turkish soda ash exports to pivot to Asia, resulting in industry oversupply pressuring TCL's EBITDA margins. Fitch Ratings expect persistent oversupply to weaken TCL's profits and credit metrics in FY25, before a gradual recovery from FY26, the rating agency said.

Fitch expects the excess supply in the soda ash industry to continue in FY25 as demand growth remains weak in the US and UK, and new capacities are commissioned in the US and China. The rating agency expects industry conditions to start rebalancing from FY26, as improving market growth spurs demand, sustainable end-use industries like lithium processing and solar panels aid growth, and producers rationalise capacity amid cost and sustainability pressures. It expects low-single-digit percentage growth in industry demand to balance supply additions over the long term.

Margins will improve to 17 per cent from FY26 supported by a gradual demand recovery, supply tightening, and lower energy cost. However, a prolonged period of unfavorable economic conditions and supply glut in the industry could limit margin improvement, Fitch Ratings said.