Tata Chemicals

Current market price: Rs 276.10
Target Price: Rs 319
Upside: 15.5%
Brokerage: Emkay Global Financial Services

Tata Chemicals (TCL) failed to cash in on the sharp rally in soda ash spot prices (up about 42 per cent in FY08) as 89 per cent of its soda ash sales volume was on long term contract.

And now, with soda ash prices expected to soften on the back of demand slowdown from China, increased capacities and overall correction in commodities, probability of TCL benefiting through price hikes in contract renewals seem bleak.

Rising interest burden, sharp depreciation in rupee vis-à-vis the US dollar, weak global equity markets (where company has parked its pension fund liabilities) and possibility of fertiliser subsidy payments in bonds are key near term concerns for the company.

However, improvement in fertiliser business due to increase in urea capacity and increased profitability of Morocco-based chemical company, Indo Maroc Phosphore (in which TCL holds 33 per cent stake) is likely to remain a big positive driver in the near future. The brokerage has revised TCL’s earnings estimates downward by 12.4 per cent and 16.4 per cent for FY09E and FY10E, respectively. It has recommended a Hold, with a revised price target of Rs 319 as against Rs 466 earlier.

CMP as on 19 Sept.

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