Q1FY24 Review: Tata Chemicals: Overhang of excess supply looms

9 Aug 2023 , 12:33 PM

Tata Chemicals (TCL) reported weaker-than-expected results, as robust profitability in US was offset by weak volumes across geographies and moderation in UK/Africa profitability. Augmentation of new capacities in 2023 and 2024 will now turn Soda Ash into a surplus market in the near term (9-12 months); hence, will supress profitability in FY25 and FY26. Therefore, analysts of IIFL Capital Services lower their realisations assumption for FY24-26, resulting in ~3- 7% cut in Ebitda estimates and 4-9% cut in EPS. While valuations at 12x FY24/25 P/E are not expensive, supply additions worldwide pose risk to the estimated earnings. Analysts of IIFL Capital Services become cautious on the global Soda Ash market and downgrade the stock to REDUCE. 

Lower volumes across geographies: 

Tata Chemicals (TCL) reported weaker-than-expected results, mainly due to lower volume offtake across geographies as customers delayed purchasing decisions because of new supplies expected from Inner Mongolia. TCL subsidiaries’ Ebitda missed IIFLe by ~9%, driven by lower-than-expected profitability from the UK/Africa operations. On the other hand, US business operations reported better-than-expected profits (topped IIFLe by 13.6%), due to stable prices in both US and export market. 

Soda Ash market to turn surplus in near term: 

With the augmentation of several new capacities during 2023 and 2024, Soda Ash will now turn surplus in the near term. Management expects surplus supply to prevail for next 9-12 months, which might also get extended to 15-18months if China demand continues to remain weak. New capacity of 1.5mn tons in Inner Mongolia has come online at least 6 months ahead of time, with another 1.5mn expected in 2024. Thus, China will witness 17-18% capacities coming on stream in 2 years. 

Earnings to become vulnerable: 

In the scenario of a reversal of the soda ash cycle, the company will enter into a phase of lacklustre earnings. Any significant increase in supply due to upcoming capacities has the potential to impact spot prices and weigh on CY24 contract renewals. Near-term earnings estimates become vulnerable now.