India Tata Chemicals Accumulate

Fertilizers CMP: 230 Target: 345

Investment Period: 1 year

Priced on 12th JUNE, 2009
±% potential
We initiate a Buy call on Tata Chemicals with a 50% upside potential on the stock from the
current levels. Investment advice is based on very strong balance sheet, diversified
businesses and strong Domestic Business for the company.
+50% Highlights:

Investment Arguments
Tata Chemicals has increased its production of its Barbala facility from 864,600 tonnes to
Market Data 1.15 million tonnes. Urea production at the Barbala plant has stabilized at over 3,500
tonnes per day levels. The previous quarter saw the highest ever urea sales on the back
Beta 0.8903
of improved availability after debottlenecking the plant.
52Wk hi/lo 375.50/99.70
Market cap, INR Crore 5234 Global Soda Ash Operations are running at 70-75% capacity due to sluggish global
Shares in issue (mn.) 235.17 demand and 9% incentive to Chinese producers.
Reuters TTCH.BO
Bloomberg TTCH@IN The company’s current news & future projects.
1. Tata Chemicals Ltd expects demand to ease to 3.5-4 percent in FY10 from 5
percent last year as its overall growth rate comes down.
th
(Source- Reuters , 8 June 2009).
2. Tata Chemicals would be investing 250 Crore FY10, 50 Crore in setting up a
customised fertiliser plant at Barbala in the northern state of Uttar Pradesh in 2010
th
Share Holding Pattern (%) and the rest in normal maintenance of assets. (Source- Reuters, Mumbai 28
Promoters 29.2 May). Capital Outlay has been trimmed down from 500 Crore to Rs. 250 Crore
due to anticipation of lower demand sighting general Economic Conditions.
FII 8.3
3. There will be increased Interest outgo as Company has started to repay loans for
Domestic Inst. & Corp Body 37.6
USD 300 million raised for expansion.
Public & Others 25.3
Projections
FY08 FY09 FY10E FY11E FY12E
Net Sales 6760 12160 10944 11820 13120
% Growth 4 106 -10% 8% 11%
Operating Profit 1184 1978 1313 1891 2230
Interest & Depreciation 436 818 750 750 750
PBT before EO and Min. interest 748 1160 563 1141 1480
EO 478 230 100 100 100
PBT after EO before MI 1226 1390 663 1241 1580
Net profit 964 991 517 931 1185
No. of shares 24 24 23.5 24 24
EPS 39 22 22.0 39.6 50.4
P/E 5.8 10.3 8.6 5.7 4.5
BV 175 209 207 237 276
Source: Fairwealth Research Estimates

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 Buy: Tata Chemicals

Quarterly Result Round up:

Q4 FY09 Q4 FY08 Y-o-Y
Growth
(%)
Net Sales
1894 1460 30
Other Income Operating
38 514 -93
Operating Profit
236 246 0
OPM Margin (%)
13 17
Interest
114 39 190
PBDT
161 722 -78
Depreciation 108 79 36
PBT
53 642 -92
National Forex gain/loss
290 -9 LP
PAT
343 633 -46
Extra-Ordinary
-234 -69 239
PAT
172 528 -67
EPS
99 101 -2
Source: Company Data, Capital Line

Result Analysis:
Tata Chemicals posted excellent consolidated top-line growth of 30% to Rs 1,894.58
th
Crore during the 4 quarter ended March 2009.
Company’s global operations have faced strong headwinds, especially Soda Ash
business which is expected to run at only 70-75% utilization, however domestic
Businesses will do well.
Year on Year numbers are not Comparable as last year Company had other Income
of 514 Crore, on account of Sale of Investments

Full year performance:

The consolidated top-line of the company for the full year ended March 2009 more
than doubled to Rs 12,257.66 Crore mainly backed by the record growth in sale of
urea during the year under review.

OPM falling 230 bps to 16.1% during the year. Thus the absolute operating profit
increased by 78% to Rs 1,978.34 Crore during the year.

The interest cost and the depreciation allowance during the period increased by
189% and 35% to Rs 395.26 Crore and Rs 422.64 Crore respectively. Hence the
profit before tax before forex gain/loss was flat at Rs 1,243.81 Crore during the year
ended March 2009.

The company's subsidiaries Brunner Mond, IMACID and GCIP posted decent growth
during the year under review.

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 Buy: Tata Chemicals

World’ second largest Soda Ash and third largest

Sodium Bicarbonate producer. Company Description

12% market share in Urea Market among private
players.
Tata Salt continues at number one position with
market share of about 44%. Tata Salt Lite has
become the market leader in the low sodium salt
category within the first year of its launch
Established in 1939, Tata Chemicals Limited (TCL) is the world’s second largest
producer of soda ash with manufacturing facilities in India, UK, Kenya and USA
and total capacity of 5.5 MT Per Annum. Soda Ash production of Tata Chemicals has
gone up from 0.9 MT in 2005 to 5.5MT in 2009. Almost all of the capacity increase has
been led by inorganic Growth. Company is also world’s third largest manufacturer of
Sodium Bi Carbonate.
The company also manufacturers bulk chemicals like sulphuric acid, phosphoric acid,
and Sodium Tripoly Phosphate (STPP). TCL is also India’s leading manufacturer of urea
and phosphoric fertilizers and is the pioneer and India’s market leader in the branded,
iodized salt segment.

TCL has undertaken several key steps recently to leverage its expertise in chemistry and
agriculture to develop high-tech and more sustainable products. It set up the TCL
Innovation Centre in 2004 to develop world-class R&D capability in the emerging areas of
nanotechnology and biotechnology. Leveraging its in-house research capabilities in
biology and crop genomics, it is developing a significant presence in bio fuels space and
is setting up a 30KL per day pilot plant at Nanded, in Maharashtra, which will use sweet
sorghum as feedstock. TCL has also undertaken field research on Jatropha, a non-edible
tree crop for biodiesel production. Most recently, its subsidiary, Tata Chemicals Asia
Pacific Pte Ltd, entered into definitive agreements with JOil (Singapore) Pte Ltd. JOil, a
Jatropha seedling company based in Singapore, set up by the Temasek Life Sciences
Laboratory Ltd (TLL), along with other investors in Singapore.

Total NPK : Consumption(Thousand

Tonnes)
Year
Country 2006 2005 2004
Industry Potential:
Brazil 8878 8720 10655
China 50151 46668 43077 The Indian fertilizer industry with a capacity of 12.1 Million MT of nitrogen and 5.6 million
India 21652 20340 18400 MT of phosphoric nutrient is one of the largest in the world and has over the years,
played a significant role in the development of agriculture in the country. Fertilizer
United States 20835 19273 20091 consumption in India is among the highest in the world, however compared to total arable
Source: CIA world Fact book land in India, our Fertilizer usage per acre of Crop is less than all major agricultural
nations. Considering the overall poor quality of Soil in most parts of India, India’s
dependence on Fertilizers is ever Increasing. We expect Industry to grow by 6% over
Total NPK : Production next 5 years, double our estimates for Agricultural Growth.
Year
Country 2006 2005 2004
Brazil 3117 2899 3046
China 46127 42691 39379
India 15513 15202 15357
United States 15694 17762 18217
Source: CIA world Fact book

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The average phosphoric acid price for the
th
company during the 4 quarter was USD 760
per metric tonnes and the current price has
fallen to USD 630 per metric tonnes.
Global Soda Ash Business is likely to
continue face Challenges due to lower overall
demand and 9% incentive from Chinese
Government. Margins from this business
(Brunner Mond and GCIP) will be impacted IN
FY10.
TECHNICAL OUTLOOK TATACHEM
TATACHEM is in a long term uptrend the stock has a good support at 220-200 area. Stock is a good buy on every dip for a Target
of 308 in next 5-6 months.
Fairwealth Securities
Buy: Tata Chemicals
Investment Advice:
We are bullish on Indian Fertilizer sector as a whole Tata Chemicals is the safest bet in the
sector due to its strong diversification in Chemicals and Food additives business.
Stable Earnings and Revenues Visibility: Company has only 250 crores of Capital
Expenditure planned for the year and not much capacity would be added in the near future.
Thus Company’s top line and bottom line are expected to remain stable over next few years
and not much variation would be seen.
Company has 1438 Crores of Cash in hand (including Fertilizer Bonds of 444 crores).
Operating cash flows are and will continue to remain healthy.
Company has a very per share Book Value of Rs.172, thus P/V of only 1.3.
Market Value for Quoted Equity stands at Rs. 750 crores, against cost of 142 crores.
Outlook and Valuation
The company has plans to invest Rs 250 Crores in Capex this year.50 Crore would go into
setting up a customised fertiliser plant in the Barbala plant in Uttar Pradesh in 2010. Rest of
it would be utilized general maintenance work
While margins might get impacted for overseas Operations (Soda Ash Busines),
Indian Operations are expected to run smoothly for the Company.
We give Company a buy on strong Balance Sheet and revenue visibility in the long
term. We give stock a buy with a target price of 330 over a period 6 months to 1 year.
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 Buy: Tata Chemicals

Key Risks:

Downside risks to our Investment calls are:

(1) One of the major Risks for the stock is the price of Soda Ash. Company being world’s
second largest Soda Ash producer with capacity of 5.5 MT, is highly dependent on Global
prices and demand for Soda Ash, which is a raw material in Glass Industry. Industry is
already facing lower global demand and running at 70% capacity, a deeper global
recession will hit margins more than we have estimated.

(2) Company is also one of the largest producer of Urea in the country,
country however not much
risks are reali
realizable as India’s
s fertilizer sector is saved from Global volatility as Domestic
Fertilizer Industry in is protected from Government. India has imposed 20% Safegaurd
duty on Imports from China, which are expected to continue for now.

(3) One of the major costs for Fertilizer manufacturers is availability of Cheap Raw Energy
resource, mainly Natural Gas and Naptha. While Barbala unit of TCL in Uttar Pradesh is
the most efficient Fertilizer plant in the country. Availability of Cheap Energy is the major
risk which can impact pro
profitability of the Company.

Price Performance Tata Chemicals is a low beta stock, with a beta

of 0.9. Share has started underperforming the
broader index, since October, while charts do
not show any Extra Ordinary movement in the
price, we believe the share will ride high pure
based on its strong Fundamentals and its
balance sheet.
While results forr next 2 quarters can be sharply
below expectations over a long term, share will
give decent returns.

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 Buy: Tata Chemicals

Annexure:

Income Statement:
FY 08 FY 07 FY 06 Margins
INCOME :
Key Margins FY08 FY07 FY06
Net Sales 5982 5763 3993
Other Income 702 170 155 PBIDTM (%) 19.25 19.4 20.15
Stock Adjustments 75 -21 101 PBITM (%) 14 14.65 15.7
Total Income 6759 5912 4249 PBDTM (%) 16.97 17.73 18.99
EXPENDITURE : CPM (%) 14.99 13.57 14.82
Raw Materials 2372 2339 1928 APATM (%) 9.74 8.82 10.36
Power & Fuel Cost 939 764 422 ROCE (%) 12.85 19.83 15.97
Employee Cost 478 349 169 RONW (%) 18.42 21.01 19.09
Other Manufacturing
415 435 284
Expenses Operating Margins have decreased by only 100bps over last 3
Selling and Admin. years, going forward we expect these will contract sharply by 300
714 668 479
Expenses bps and 450 bps for FY09 and FY10E. We have estimated PBIDTM
Miscellaneous Expenses 216 239 136 for FY 10 between 12% and 14%, margins are estimated to climb
Total Expenditure back to 16-17% for FY11.
5133 4794 3416
Next few years are expected to be years of Consolidation for the
Operating Profit stock.
1626 1118 833
Interest 137 96 48
Gross Profit 1490 1022 785
Depreciation 314 274 184
Profit Before Tax 1176 748 601
Tax 211 240 172
Net Profit before Minority
964 508 428
Interest
Net Profit after Minority
964 508 428
Interest
Extraordinary Items 382 -1 3
Adjusted Net Profit 583 509 426
Equity Dividend (%) 90 80 70
EPS after Minority
40 22 19
Interest (Adj) (Unit Curr.)
Book Value (Unit Curr.) 160 121 104
Source: Company Report, Capital Line

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 Buy: Tata Chemicals

Fund Flow Statement:

2008 2007 2006

SOURCES OF FUNDS
Key ratios
Share Capital 234 215 215
Key Ratios FY08 FY07 FY06
Reserves Total 3499 2378 2028
Total Shareholders’ Funds 3733 2593 2243 Debt-Equity Ratio 1.06 0.76 0.81
Secured Loans 643 862 462 Long Term Debt- 0.97 0.68 0.8
Equity Ratio
Unsecured Loans 4207 1002 1366 Current Ratio 0.9 0.89 1
Total Debt 4850 1864 1828
Turnover Ratios
Total Liabilities 8584 4457 4071
APPLICATION OF FUNDS Fixed Assets Ratio 0.68 0.95 0.74
Net Block 7754 3590 2928 Inventory Ratio 7.64 8.64 5.92
Capital Work in Progress 266 230 559 Debtors Ratio 5.52 6.65 5.4
Investments 417 775 547 Interest Cover Ratio 6.13 8.78 13.47
Current Assets, Loans &
Advances
Inventories Debt Equity:
930 635 698
Sundry Debtors 1200 966 766 Company’s Debt Equity ratio has been rising as new
Cash and Bank 677 154 116 Debt’s has been raised to acquire new Companies in US.
Loans and Advances However overall situation remains comfortable as Debt
621 258 273
Equity will remain around 1.5 and Net Debt to Equity Ratio
Total Current Assets 3428 2014 1853 will remain around 1.
Less : Current Liabilities
and Provisions
Inventory Turnover:
Current Liabilities 1934 1108 859
Provisions 1080 814 735 Company has achieved higher Cash flow utilization and
Total Current Liabilities 3014 1922 1594 Operational efficiencies by increasing Inventory Turnover
Ratio.
Net Current Assets 1934 1108 859
Net Deferred Tax -269 -234 -229 Interest Coverage Ratio:
Total Assets 8584 4457 4071
Contingent Liabilities Interest Coverage Ratio will fall to around 4 for FY09 and
389 349 1324 FY10, however that is manageable and won’t hit
Source: Company Report, Capital Line Companies balance sheet or Profitability.

Cash Flow Statement:

2008 2007 2006

Cash and Cash Equivalents at Beginning
of the year 94 46 752
Net Cash from Operating Activities 481 677 246
Net Cash Used in Investing Activities -1797 -16 -877
Net Cash Used in Financing Activities 1499 -613 -75
Net Inc/(Dec) in Cash and Cash
Equivalent 183 48 -706
Cash and Cash Equivalents at End of the
year 278 94 46
Source: Company Report, Capital Line

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 Buy: Tata Chemicals

Coverage:

Our Stock coverage and Returns:

BUY REPORTS:
% return
Price on
Stock Target Price as on Call date % return absolute Relative
26th may
to Sensex
Set Target
Stock Sensex Stock Stock Sensex
Date Price
Educomp 22-Jan-09 2750 1715 8814 2,861.10 66.83% 57.85% 8.98%
Havells 30-Jan-09 280 115 8325 281 144.35% 67.12% 77.22%

Jaiprakash
12-Feb-09 110 73 9466 185.6 154.25% 46.98% 107.27%
Associates

Lupin 03-Feb-09 780 630 8607 862.6 36.92% 61.65% -24.73%

Tata Steel 06-Mar-09 250 152 8325 368.7 142.57% 67.12% 75.44%
M&M 12-Mar-09 440 345 8344 633.8 83.71% 66.74% 16.97%
Unitech 25-Mar-09 51 34 9667 77.15 126.91% 43.92% 82.99%
Punj Lloyd 30-Mar-09 120/145 85 9549 179.8 111.53% 45.70% 65.83%
Sintex Industries 16-Apr-09 240 137 10,947 218.5 59.49% 27.09% 32.39%
Alok Industries 26-Apr-09 28 14 11,371 21 50.00% 22.36% 27.64%

SELL REPORTS:
% return
Price on
Stock Target Price as on Call date % return absolute Relative
26th may
to Sensex
Bharat Electronics
Ltd
21-May-09 1059 1319 13,736 1,343.55

Note: Based on 25th May 2009 Sensex closing of 13,913

Note: All calls are initial/ first time calls
Note: All reports can be accessed on our website under http://www.fairwealth.in/Research.aspx

Note:

Fundamental and Technical reports are independently given and investors are advised to take their decision based on their investment
profile and holding periods.

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 Buy: Tata Chemicals

Disclaimer

This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. While
the information contained therein has been obtained from sources believed to be reliable; investors are advised to satisfy themselves before making
any investments. Fairwealth Securities Pvt Ltd does not bear any responsibility for the authentication of the information contained in
the reports and consequently, is not liable for any decisions taken based on the same. Further, Fairwealth Research Reports only provide information
updates and analysis. All opinion for buying and selling are available to investors when they are registered clients of Fairwealth Investment Advisory
Services. As a matter of practice, Fairwealth refrains from publishing any individual names with its reports. As per SEBI requirements it is stated that,
Fairwealth Sec Pvt Ltd., and/or individuals thereof may have positions in securities referred herein and may make purchases or sale while this report is
in circulation.

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