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Tata Chemicals Equity Research

HomeCompanyTata Chemicals Equity Research

Date of Research – 21 January 2016

Price – Rs. 342.45

About the Company

Tata Chemicals Limited (“Tata Chemicals” or the “Company“) manufacture inorganic chemicals, fertilizers, and agri-inputs comprising urea, pesticides, herbicides, specialty nutrients, and seeds. The Company’s inorganic chemicals include soda ash, sodium bicarbonate, salt, and cement, as well as calcium chloride.

The Company sells salt under brands like Tata Salt, i-Shakti, and Tata Salt Lite; cement under Tata Shudh brand, sodium bicarbonate under the Alkakarba and Sodakarba brands; and calcium chloride under the Aquex brand. Additionally, it provides Tata Swach water purifiers; and pulses under I-Shakti brand.

In 2006, Tata Chemicals completed the acquisition of UK-based Brunner Mond Group, one of the world’s leading manufacturer of soda ash and associated alkaline products. In 2008, the Company acquired US-based General Chemical Industrial Products which has helped Tata Chemicals to become world’s second largest producer of soda ash with manufacturing facilities in Asia, Europe, Africa and North America. The Company has also entered into a joint venture with Singapore’s Temasek Life Sciences Laboratory to develop jatropha seedlings (processed to produce a high-quality biodiesel fuel, used in a standard diesel engine) to enable bio fuels capability.

Key Financial Figures

Consolidated (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations 14,858.83 15,895.43 17,202.94 17,708.14 13,288.92 
Expenses 12,695.92 14,086.00 15,045.52 15,542.97 11,065.30  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 2,162.91 1,809.43 2,157.42 2,165.17 2,223.62  
Depreciation 533.88 471.24 463.14 464.61 534.73  
Finance Costs 463.91 579.29 454.03 551.75 411.16  
Other income 417.78 142.42 117.97 122.59 166.12  
Exceptional items 669.87 1,420.21 199.71 (12.75) 
PBT 913.03 (518.89) 1,158.51 1,271.40 1,456.60  
Tax 302.52 288.78 351.12 291.53 357.33  
PAT (before Minority Interest and share of Associates) 610.51 (807.67) 807.39 979.87 1,234.10  
Profit/ (loss) attributable to Minority Interest 207.03 221.00 205.53 196.56 – 
Share of profit / (loss) of Associates 3.08 3.33 5.40 3.15 – 
Consolidated Profit / (Loss) for the year 400.40 (1,032.00) 596.46 780.16 1,234.10  

Profitability Analysis

Consolidated (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Operating Profit Margin Ratio 14.56 11.38 12.54 12.23 16.73 
Net Profit Margin Ratio 4.11 (5.08) 4.69 5.53 9.29 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Share Capital 254.82 254.82 254.82 254.82 254.82 
Reserves & Surplus 4,485.86 6,158.74 5,310.69 5,296.89 6,033.58 
Net worth (shareholders funds) 5,017.23 6,413.56 5,565.51 5,551.71 6,288.40 
Minority Interest 536.14 655.22 673.49 747.01 
Long term borrowings 2,202.57 5,460.90 6,909.76 5,708.25 6,743.50 
Current liabilities 3,415.78 6,084.67 5,164.93 6,937.96 5,301.36 
Other long term liabilities and provisions 150.34 1,586.90 1,638.06 1,707.04 1,808.29 
Deferred Tax Liabilities 88.67 153.45 276.92 227.16 204.49 
Total Liabilities 10,874.59 20,235.62 20,210.40 20,805.61 21,093.05 

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Fixed Assets 2,075.41 4,670.33 4,751.96 4,591.25 4,892.48 
Noncurrent Investments 4,613.62 598.37 434.21 437.42 440.98 
Current assets 3,980.16 7,499.82 7,462.80 8,176.89 7,668.97 
Long term advances and other noncurrent assets 205.40 681.06 752.90 622.10 633.61 
Deferred Tax Assets 159.02 85.92 20.96 62.72 
Foreign Currency Monetary Item Translation Difference Account – 
Goodwill on consolidation (net) 6,627.02 6,722.61 6,956.99 7,394.29 
Total assets 10,874.59 20,235.62 20,210.40 20,805.61 21,093.05 

Efficiency Analysis

 
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 
ROCE 25.45 17.43 13.78 18.08 15.71 
ROE / RONW 12.08 6.24 (18.54) 10.74 15.58 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations (Rs. Cr.) 14,858.83 15,895.43 17,202.94 17,708.14 13,288.92 
Growth (%) 7.63 % 6.98 % 8.23 % 2.94 % (24.96 %) 
PAT (Rs. Cr.) 400.40 (807.67) 807.39 979.87 1,234.10  
Growth (%) (52.20 %) (357.74 %) 199.97 % 21.36 % 25.95 % 
Earnings Per Share – Basic (Rs. ) 15.72 (40.51) 23.41 30.62 33.69 
Earning Per Share – Diluted (Rs. ) 15.72 (40.51) 23.41 30.62 33.69 
Price to Earnings 20.51 18.60 12.19 18.28 

Dividend History

The Company has maintained an average dividend yield of 3.04 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Tata Chemical’s average current ratio over the last 5 financial years has been 1.27 times which indicates that the Company is comfortably placed to pay for its short term obligations.

Long term Debt to Equity Ratio

Companies operating with high long term debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Tata Chemical‘s average long term debt to equity ratio over the last 5 financial years has been 0.98 times which indicates that the Company operates with considerate level of debt and is placed well to withstand economic slowdowns.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Tata Chemical’s average interest coverage ratio over the last 5 financial years has been 4.65 times which indicates that the Company can meet its debt obligations without any difficulty.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Tata Chemical reported a promoter holding of 30.80 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 47.17 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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