Recommendation: Add
Target Price: Rs 1,015
Given the resilient demand for soda ash across cycles, long-term operating rates are above 80% and market conditions are tight. Solvay expects to achieve 10% Ebitda Cagr over 2022-27 (2x of Ebitda Cagr over 2013-22), driven by — market tightness, volumes from new capacities in the US and reinvention of the ‘Solvay process’ for synthetic soda ash in Europe. Given Solvay’s constructive outlook, analysts at IIFL Securities have retained their positive view on Tata Chemicals.
Solvay expects prolonged tightness in soda ash
Soda ash has been resilient throughout cycles with stable demand growth. Long-term operating rates are stable (above 80%) and market conditions are tight. Global soda ash demand will grow 2-3% over 2022-27F. Around 90% of Solvay’s soda ash contracts have been negotiated and finalized for 2023, along with committed volumes for the year. Solvay guided 10% Ebitda Cagr for 2022-27 (versus 5% Cagr in 2013-22).
Serious intent to reduce carbon footprint
Solvay aims to reinvent traditional processes, reduce emissions and phase-out coal, in order to achieve carbon neutrality by 2050. Higher carbon costs (regulated in Europe) are creating pressure for synthetic soda ash manufacturers, and new capacities will have to be more carbon-efficient. This would limit the addition of fresh capacities by synthetic soda ash manufacturers. This is clearly evident from the shift towards natural soda ash in the US, which now accounts for most of the new capacity announcements.
Retain positive stance on TTCH
Solvay’s outlook on the Soda Ash market reiterates prolonged market tightness and gradual on boarding of fresh capacities. This augurs well for Tata Chemicals as the company will continue to witness benefits from price negotiations in 2023. FY24 estimates of IIFL Securities do not factor these tailwinds in a meaningful way and analysts at IIFL Securities would turn more constructive post Q4 results.
