dimensional securities pvt ltd. chemicals stock idea.pdf · while the global nutraceutical industry...

Tata Chemicals Ltd. Stock Idea

Date: 14th Sept, 2017

CMP: 637

Price Target: Rs. 764

Recommendation: BUY

Dimensional Securities Pvt Ltd.

1 Regd. Office: 298, Perin Nariman Street, 4th Floor, City Ice Building, Fort, Mumbai - 400 001.

Investors are advised to refer through disclosures made at the end of the Research Report

MARKET DATA NSE TICKER TATACHEM Networth FY17 (Rs in Crs) 7908.2 P/BV Ratio (FY17) (x) 1.9 EPS (FY17 )(Rs.) 47.9 Market Price (Rs.) 638 P/E Ratio (TTM) (x) 13.3X 52 Week High (Rs) 665 52 Week Low (Rs) 446 Market Capitalisation (Rs. Cr) 16150

AVERAGE MONTHLY VOLUME (‘000)

BSE 63.2

NSE 385.6

SHARE HOLDING PATTERN

Promoter 30.8

FII 16.1

DII 31.3

Public 21.8

RETURN (%) 3M 6M 12M Tata Chem 2.6 13.3 26.4 Sensex 5.0 13.0 23.3

Tata Chemicals Limited (TCL) is a global company with interests in Chemicals,

Fertilizers and Consumer businesses. Company’s main product offerings include

Soda Ash, Sodium Bicarbonate, Iodized salt, Phosphatic Fertilizers and

Agrochemicals. TCL is world’s second largest producer of soda ash and third

largest producer of Sodium Bicarbonate with manufacturing facilities in Asia,

Europe, Africa and North America. TCL is also largest manufacturer of iodized salt

in domestic market with share of ~25%.

Management’s focus towards increasing consumer business:

Tata Chemicals is the largest organized salt producer in India with market share of

over 60% in branded salt segment and around 25% in overall salt market. The

total market size of salt in India can be estimated at around Rs. 5600-6000cr p.a.

and company is aiming to increase its share significantly over next 5-10 years by

leveraging on its brand and pushing its economy product ‘iShakti’ in regions

which are catered by unorganized players. With steady and recurring demand,

faster working capital cycle and high margin and return ratios, the Salt business is

a cash cow for Tata Chemicals.

Besides Salt, over last 3-4 years Tata Chemicals ventured into various other

consumer businesses like Dals, Spices Mix and Water Purifiers as a part of its

strategy to increase contribution from consumer centric businesses.

Focus on improving operating efficiencies and consolidating market share

in inorganic chemical segment:

In the Soda Ash business while Europe and North American businesses are

expected to consolidate, the Indian and African business will lead the growth.

Company would be generating steady and huge free cash flows from this business

which will be utilized for expansion in other areas, mainly consumer business and

specialty chemicals.

Agriculture Division to Focus on cash flow generation

During FY17, TCL sold off its Urea Plant in UP for a consideration of Rs. 2670 cr.

in line with Co.’s strategy of not investing in regulated and working capital

intensive businesses. The remaining Agri Businesses i.e. Phospatic Fertilizers would

focus on free cash flow generation while Rallis (in which TCL owns 50.1% stake) is

expected to grow in double digits, taking advantage of under-penetrated Indian

pesticides market and focus on growing exports and seeds business.

Venture into new areas to create value:

TCL has identified two new business areas where it would start operations;

Nutraceuticals and Highly Dispersible Silica. Both these industries have huge

markets globally. While the global Nutraceutical industry is valued at $205 bn, the

specialty silica market is estimated to be of $4.2 bn. Both these businesses are

expected to generate RoCE of 18-22%.

Valuation & View:

The management of TCL is changing its approach and their focus is on increasing

the share of Consumer Business and Specialty Chemicals going ahead. Emphasis

is also on positive cash generation and moving away from regulated and capital

intensive businesses to high return generating business. We have valued the

company on SoTP method based on our estimates of FY18 numbers and have

arrived at a target price of Rs. 764 for the company.

[email protected]

mailto:[email protected]

Tata Chemicals Ltd.



About the Company:

Tata Chemicals Limited’s ‘TCL) operation is organized under four segments i.e. (1) Inorganic Chemicals comprising Soda Ash,

Sodium Bicarbonate, Marine Chemicals, Caustic Soda and Cement, (2) Fertilizers comprising Fertilizers and other traded

products, (3) Other Agri-inputs including Rallis India Limited’s operations and (4) Consumer comprising Salt, Pulses, Spices,

Water Purifier and other consumer products.

Consumer Business Inorganic Chemicals Crops Nutrition & Business

- Iodized Salt (9.5% of Sales)

- Spices, Dals and Water Purifiers (2.5% of Sales)

- Soda Ash (56.0% of Sales)

- Sodium Bicarbonate (3.0% of Sales)

- DAP/NPK (23.4% of Sales)

- Other Agri Input (Rallis India (5.6% of Sales)

Based on FY17 Sales

Investment Rationale:

CONSUMER DIVISION: Management’s focus area.

Iodized Salt: Steady business and cash cow for the company

Tata Chemicals is the largest organized salt producer in India with market share of over 60% in branded salt segment and

around 25% in overall salt market. Company sells iodized salt under its flagship brand Tata Salt and a cheaper alternative

iShakti. The purpose of launching a cheaper alternative is to increase the market of iodized salt and shift consumer preference

from unorganized salt to organized salt which is healthier. TCL has priced iShakti at 25-30% discount to Tata Salt and its target

market is mainly in Tier 2 & Tier 3 towns where the share of unorganized salt is higher.

The total market size of salt in India can be estimated at around Rs. 5600-6000cr p.a. and company is aiming to increase its

share significantly over next 5-10 years. Company is adopting a three pronged strategy to increase its market share;

- By shifting consumption from unbranded salt to branded ones by pushing its economical brand iShakti mainly in tier 2

and tie 3 cities.

- Increase its dealer presence. Currently the salt division has dealer network of 200,000 dealers and company will be

adding many more dealers to widen its presence.

- Focusing on marketing by highlighting benefits of iodized salt over unbranded ones.

TCL would look to capture ~2% market share every year and emerge as a dominant player in the salt market over next 5-10

years. With steady and recurring demand, faster working capital cycle and high margin and return ratios, the Salt business is a

cash cow for Tata Chemicals.

TCL’s Salt Division’s performance:

Particulars FY15 FY16 FY17

Table Salt (in MT)

Production 801,000 857,000 998,000

Sales 955,000 1,044,000 1,024,000

Growth 9.3% -1.9%

Revenue (estimate in cr) 1180.0 1326.6 1336.4

Growth 12.4% 0.7%

Source: Tata Chemicals, Dimensional Research

Dal, Pulses and Spices- Sunrise businesses

Besides Salt, over last 3-4 years Tata Chemicals ventured into various other consumer businesses like Dals, Spices Mix and

Water Purifiers as a part of its strategy to increase contribution from consumer centric businesses.

Tata Chemicals ventured into selling Spices (Kitchen Masala) in 2013-14 under its brand name Tata Sampann. Currently

company has got 10 varieties of spices and it’ll add more every year. Out of current 10 varieties they have, 7 have been

formulated and blended by popular chef Sanjeev Kapoor. Company’s focus currently is on pushing its brand and enter wider

households which would increase recurring sales to its customers.

Tata Chemicals Ltd.



Company is getting good response for their products and have garnered decent amount of market share in certain pockets

where it operates. Its major presence is in the Northern region, especially Punjab where it first entered with its products. In

Punjab currently company has gained around 5-6% market share and it gradually aims at taking 15-16% market share over

next 4-5 years. In the Spices business, Company did revenue of ~Rs. 45 cr during FY17 and it expects it to grow to 65-80 cr in

FY18 and then to ~Rs. 250-300 cr over next 4-5 years. Over a longer term, Company expects to replicate what it did in salt

business in spices too. Over next 8-10 years they expect to generate substantial revenues from this business.

Tata Chemicals also has a small consumer facing business dealing in dal, pulses and besan and Water Purifiers. The total

contribution to revenue from these businesses stands at ~Rs. 310 cr.

INDUSTRIAL CHEMICALS: Focus on improving operating efficiencies and consolidating market share

Tata Chemicals is the world’s second largest producer of soda ash with manufacturing facilities in Asia, Europe, Africa and

North America. It is also the world’s third largest producer of Sodium Bicarbonate.

Soda Ash:

Capacity Break Up:

Location Total Capacity (in MT) Capacity Utilization

India- Synthetic Soda Ash 1.0 MMT p.a. 80%

North America- Natural Soda Ash 2.5 MMT p.a. 70-75%

Europe- Synthetic Soda Ash 0.5 MMT p.a. 90%

Africa- Natural Soda Ash 0.3 MMT p.a. 70-75%

Total Capacity 4.3 MMT p.a.

Source: Tata Chemicals

Soda Ash or Sodium Carbonate is manufactured from Lime Stone, Coke, Coal and Natural Gas. The largest consumption of

sodium carbonate is in the manufacture of glass, paper, rayon, soaps, and detergents.

Usage of Soda Ash:

■ Global Usage of Soda Ash ■ Indian Usage of Soda Ash

■ Flat Glass ■ 25% ■ Flat Glass ■ 10%

■ Container Glass (Bottles) ■ 25% ■ Container Glass (Bottles) ■ 9%

■ Soaps & Detergents ■ 15% ■ Soaps & Detergents ■ 37%

■ Chemicals ■ 9% ■ Chemicals ■ 21%

■ Alumina & Metals ■ 6% ■ Alumina & Metals ■ -

■ Others ■ 20% ■ Others ■ 16%

Globally and domestically, nearly 60-65% of Soda Ash production gets used up in Glass and Detergent manufacturing. Thus, these are the two industries that will drive the growth in Soda Ash volume. The domestic detergent market which grew at 13.1% CAGR over 2011-2016 is expected to grow at ~8% CAGR over next 5 years. The glass industry is expected to witness faster growth of ~12% due to increased adoption of glass in the construction and automobile industry and higher consumption of electronic and consumer goods. Globally, the detergent and the glass industry can be expected to grow at 3-4%. At global level, the demand for soda ash is expected to increase at 2.1% CAGR through 2021. While the growth will be much faster in developing economies like India (~8-10% CAGR) and Africa (6-8%), European and North American market are expected to see moderate growth of 2-3% p.a. On the pricing front, Soda Ash has been one of the most stable chemical over past few years. Balanced demand and supply situation has kept the prices within a range. Long term pricing arrangements and increasing demand in Asia has been able to suck up the excess Chinese supply over past 5-7 years.

Tata Chemicals Ltd.



Soda Ash prices per kg- Soda Ash prices in domestic market have stayed in the range of Rs. 20-30 over last 5 years.

Source: Chemicals Weekly

The capacity expansion drive, especially in China, which gained momentum during 2000s have started moderating. Due to

several environmental issues and over capacity many capacities have been shut down and net capacity addition has been

almost flat in last two years. Some pricing pressure will be seen in the European markets from Q3FY18 when Turkey, which

has world’s fourth largest reserves of natural Soda Ash, will pump in new production to the tune of 1.5 MMT p.a. and is

gradually expected to ramp it up to 2.5 MT. However the same is not expected to disturb the Indian and North American

market, as the logistical cost will make it unfeasible for supplying soda ash from Turkey to these regions.

Soda Ash Global Capacity (2015)

China 35.0 MMT

North America 13.5 MMT

Europe 12.5 MMT

Russia & Ukraine 5.0 MMT

India 3.5 MMT

Africa 1.2 MMT

Sodium Bicarbonate:

Tata Chemicals has a total of 0.2 MMT capacity of Sodium Bicarbonate in India and Europe. The requirement of Soda Ash for

manufacturing Sodium Bicarbonate is met internally by the company. Sodium Bicarbonate is mainly used in cooking as baking

powder, pest control, paint & corrosion removal, fire extinguishers and other medicinal and hygiene (tooth paste and

deodorant) uses

Industrial Chemicals: Region-wise business break-up

Tata Chemicals North America Inc. (TCNA)

■ Particulars ■ FY15 ■ FY16 ■ FY17

■ Sales in cr ■ 3024 ■ 3015 ■ 3193

■ Volume (MT) ■ 23,15,000 ■ 21,04,000 ■ 22,41,000

■ EBITDA ■ 738.8 ■ 642.3 ■ 642.9

■ EBITDA Margins ■ 24.4% ■ 21.3% ■ 20.1%

Growth in North American business is expected to be soft and in the range of 2-3% p.a through next 4-5 years. TCNA

produces Natural Soda Ash from its Green River Basin in Wyoming, USA. Natural Soda Ash are slightly superior to Synthetic

soda and since they only have to be mined, cost of production comes down drastically when compared to Synthetic Soda Ash.

That is the reason that TCNA enjoys superior margin compared to European and Indian Soda Ash business. EBITDA Margins

which have moderated at 20% are expected to remain stable at these levels going ahead.

Tata Chemicals Ltd.



Tata Chemicals Europe Holdings Ltd. (TCEHL)


■ Sales in cr ■ 1624 ■ 1652 ■ 1578

■ Volume (MT) ■ ■ 4,92,000 ■ 4,81,000

■ EBITDA ■ 132.1 ■ 175.2 ■ 235.6

■ EBITDA Margins ■ 8.1% ■ 10.6% ■ 14.9%

The Europe business will continue to consolidate in coming years. It is expected to see some pricing pressure due to Turkish

capacity coming on stream. However, since company’s presence is only in the UK market and it has long term relationships

with its clients, the pressure on pricing and margin would be limited.

Tata Chemicals Magadi Limited (TCML) (Africa)


■ Sales in cr ■ 536.2 ■ 484.1 ■ 401.6

■ Volume ■ ■ 3,07,000 ■ 2,72,000

■ EBITDA ■ 46.1 ■ 111.3 ■ 38.5

■ EBITDA Margins ■ 8.6% ■ 23.7% ■ 9.5%

During FY17, company faced some quality issues in the Kenyan business which led to lower price realization and thus margins.

They have addressed those issues sine and have been able to bring back their customers. For Q1FY18, company saw a healthy

18% growth in its top line and was able to improve its margins from lows of 9.5% during FY17 to 15% during the quarter. The

business has stabilized now and is expected to deliver good numbers going ahead. Even in Africa, Tata Chemicals owns

natural Soda Ash reserves and at optimum efficiency EBITDA Margins can climb back up to 20-22% as was seen during FY16.

CROP NUTRITION AND AGRI BUSINESS (CNAB): Focus on cash flow generation

In the CNAB division, Tata Chemicals product offerings include fertilizers, agrochemicals and seeds. While the fertilizer

business is housed within Tata Chemicals itself, the Agrochemicals and Seeds business is in Rallis India, where Tata Chemicals

holds controlling stake of 50.1%.

In fertilizers, TCL offers Urea, NPK and DAP Fertilizers across India under its brand name Paras. Company operated through

two plants; one at Haldia, West Bengal and another one in Babarla, UP. Company manufactures Urea and Customize

fertilizers at Babrala while at Haldia it manufactures Phospatic fertilizers (DAP, NPK and SSP). During FY17, company sold its

Babrala plant to Yara Fertilizers on lump sum basis for a consideration of Rs. 2,670 cr. The purchase consideration includes

subsidy receivable by Tata Chemicals to the tine of Rs. 1000 cr at the time of the deal (current outstanding subsidy from this

plant now stands at Rs. 650 cr). This transaction was in line with Co.’s strategy of not investing in regulated and working

capital intensive businesses. The sales proceeds will be received by end of Sept, 2017 and the Board will take the final cal

regarding usage of he said proceeds. The management has hinted that some of the proceeds might be used for repaying debt

and some will be returned to shareholders.

The Phosphatic Fertilizers Unit at Haldia, was impacted during previous year due to unfavorable cost structure and delay in

finalizing phosphatic acid prices during first half of the year. Company addressed the issues during the second half of the

financial year leading to improvement in top line and profitability. The focus of the company at Haldia would be on cash

generation by producing only to market needs to continue to generate positive cash. TCL will also look to sell this business if

they are able to get a good buyer and a good price. They are already in discussion with Indorama Holdings BV, Netherlands to

sell the business for a consideration of Rs. 500-600 cr.

Rallis India, which is Company’s subsidiary, is India’s leading crop care company with a portfolio in crop protection chemicals, seeds, plant growth nutrients, soil conditioners and allied agri services. Rallis also has a presence in hybrid seeds market through its subsidiary, Metahelix.

Rallis India is well placed to reap benefits from increasing opportunities in crop protection industry in India in coming

years. India is one of the world’s lowest pesticides consuming country and with Govt.’s focus more on improving yield

and productivity for farmers, the pesticide industry is expected to witness 12-14% growth through FY21.

Rallis will also benefit from potential shift of business from unorganized to organized sector. In India, presently 40-

50% of pesticide business is unorganized.

Tata Chemicals Ltd.



Focus on exports and seed business will also drive the top line and profitability for the company. Rallis’s export and

seeds business are expected to grow at 15% and 10-12% CAGR respectively.

Rallis plans to focus on contract manufacturing for exports and selectively target top players. It received two pilot

projects during FY17 which it expects to convert into full commercial contracts during FY18.

Rallis India Financials (Tata Chem hold 50.1% stake in the company)

Particulars FY15 FY16 FY17

Sales 1,814.6 1,529.1 1,678.3

EBITDA 272.7 231.4 265.2

EBITDA Margin 15.0% 15.1% 15.8%

PAT 159.8 147.0 297.0

FUTURE GROWTH AREAS: Entry into Specialty Chemicals business

New Segment: Nutraceuticals

Tata Chemicals has ventured into the new segment of Nutraceuticals for which the company has earmarked capex of Rs. 565

cr. They have already acquired the land at Nellore, AP and have set up the pilot plant.

Nutraceuticals products consists of Dietary Supplements (Vitamins, Minerals, Herbals, Non-Herbals, & Others), and Functional

Foods & Beverages which have added health benefits. The Indian Nutraceutical industry is expected to double in size to Rs

26,764cr (~USD 4 billion) by 2020 as rapid surge in the demand for dietary supplements from the upper and middle class will

drive the growth for the industry over the next five years. Rise in lifestyle diseases like Diabetes, blood pressure, obesity, cardio-

vascular problems among others, are the key drivers leading to increased demand for Nutraceutical products among the upper

and middle class. The global nutraceutial industry stands at ~USD 205 bn and is expected to grow at 6.3% CAGR through

2022.

Company will be coming our with following Products Offerings under this segment:

- Calorie free sugars, Tata NX Lite and Tata Nx Zero Sugar. Currently they are pushing sales through online marketplace

viz., Amazon, Big Basket, Grofers, etc.

- Fossence: 100 percent soluble, naturally sweet, prebiotic dietary fiber widely used for sugar replacement in bakery and

dairy products.

- CoCurcumin: A natural extract from turmeric. It is sold as an herbal supplement, cosmetics ingredient, food flavoring, and

food coloring.

- Phytoextracts: Offerings include extracts of Garcinia Cambogia, Boswellia Serrata, Ashwagandha, Ginger root,

Pomegranate, Senna extract, Bromelain and Green Coffee extract.

Silica business:

The Board of Tata Chemicals approved Rs.295 cr investment in Highly Dispersible Silica (HDS) which is a versatile product, and

a downstream addition for company’s Soda Ash business. HD Silica is finding higher usage in tyres over last few years and is

replacing carbon black in developed markets. Besides tyres, they are also used in Personal Care, Fishing Boats, Food, Coating

& Inks, Adhesives and Sealants. In terms of application, Rubber segment held the largest share for usage of HDS and industry

wise Automobile saw the highest usage. The global specialty silica market which was valued at US$ 4.40 Bn in 2015 is

projected to reach US$ 7.32 Bn by 2024 at a CAGR of 5.9% from 2016 to 2024.

The technology for manufacturing HDS has been developed at the company’s own innovation Centre, for which eight patents have been filed by it. Company is seeing huge interest in the marketplace from their customers they will be pushing this business forward in a very strong manner.

Tata Chemicals Ltd.



Valuation & View: We are valuing Tata Chemicals on SoTP method:

We are valuing the salt business at 4X our estimated FY18 sales which is 40-50% discount to leading FMCG players

which are trading at 7-8X M.Cap/Sales. The salt business like a FMCG is a non-cyclical business generating huge Free

Cash Flows and has a clear visibility of business.

We assign 2X Price/Sales multiple to other consumer business (Spices, Dal & Water Purifers) which will be growing at

a fast pace.

We value the Industrial Chemical Division like any other commodity business at 10X our estimated FY18X earnings.

For Fertilizers Business we are assigning multiple of 12X given that company’s focus is on cash generation and stay

away from subsidy and capital intensive businesses

We assign 20X P/E to Rallis India’s financials.

TCL has several cross holdings in various group companies, we expect these holdings to be monetized over 3 years

and accordingly have discounted it by Company’s WACC of 17.5% to arrive at today’s value.

Tata Global Beverage 902

Titan 875

Tata Steel 164

The Indian Hotels 107

Tata Motors 73

Tata Investments 42

Total 2163

PV (Discounted at 17.5% for 3 years. ) 1333

Besides above holding Tata Chemicals also owns 2.5% stake in parent company Tata Sons which can be valued at Rs.

12500-15000 cr. However we are not accounting for the same in our valuation as we don’t see any changes in

shareholding structure of Tata Sons in foreseeable future.

Tata Chemicals SoTP Valuation:

Particulars FY18 Multiple Value (in cr)

Salt Business 4X M.Cap/Sales 5344

Consumer Business 2X M.Cap/Sales 1050

Inorganic Chemicals 10X P/E 6390

Fertilizers 12X P/E 1614

Rallis India (50.1% share) 20X P/E 3680

Value of Holdings 1333

Total Value 19411 cr

Number of shares 25.4 cr

Value per Share Rs. 764/ share

The management of TCL is changing its approach and their focus is on increasing the share of Consumer Business and

Specialty Chemicals going ahead. Emphasis is also on positive cash generation and moving away from regulated and capital

intensive businesses to high return generating business. The new businesses viz., Nutraceuticals and HDS has ability to

generate RoE in the range of 18-22%.

TCL’s Consolidated Net Debt currently stands at Rs. 5100 cr which the company has guided to bring down to Rs. 3000-3500 cr

by FY18 end.

Tata Chemicals Ltd.



Financials:

Tata Chemicals Ltd.


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