TATA CHEMICALS: Basic Chemistry on strong footing

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–      In-line revenue; marginal miss on EBITDA: Tata Chemicals’ (TTCH) revenue increased 4% YoY to INR30.8b (our estimate: INR32.2b). EBITDA was up 5% YoY to INR6.3b (our estimate: INR6.7b), with the margin expanding 30bp YoY to 20.6% (our estimate: 20.9%). PBT declined 4% YoY to INR4.7b due to higher depreciation and lower other income. However, adj. PAT was up 10% YoY to INR3.5b (our estimate: INR3.1b) due to the deferred tax benefit. For 1HFY20, revenue/EBITDA/PAT were up 5%/12%/7% YoY.

–      Soda ash performance improves across geographies: Standalone Basic Chemistry EBIT margin expanded strongly by 670bp YoY to 29.8% in the quarter. However, Consumer margin shrank 450bp YoY due to one-time demerger-related cost and higher ad spends. In Africa, revenue increased 9% YoY, led by volume growth of 3% and the balance through realization improvement. EBITDA/MT increased 2x YoY to USD52 in the quarter on the back of improved efficiencies, lower input cost and reduced fixed cost. Europe sales declined 5% YoY due to lower trading volumes, but EBITDA was up 36% YoY led by lower manufacturing cost (RM and energy). EBITDA/MT increased 48% YoY to GBP49. In the US, EBITDA/MT improved 6% YoY to USD47 (-7% QoQ) with realizations remaining flat YoY (-1% QoQ) and sales volume growth of 1% YoY.

–      Valuation and view: Benign energy and RM costs are likely to drive the operating performance of the soda ash business across geographies. We largely maintain our estimates of revenue/EBITDA/PAT CAGR of 9%/15%/11% over FY19-21. We value the stock on an SOTP basis and arrive a target price of INR758 (implied EV/EBITDA of 8.5x). Maintain Buy.

(Report by Motilal Oswal Institutional Equities)