Q2FY24 Review: Tata Chemicals: Supply glut starts hurting profits

13 Nov 2023 , 03:30 PM

Tata Chemicals (TCL) reported weaker-than-expected results. Though soda ash volumes were largely stable QoQ across geographies, supply glut took toll on realisations and profitability. Augmentation of new capacities in 2023 and 2024 has turned global Soda Ash into a surplus market and hence, will supress profitability in FY25 and FY26, in analysts of IIFL Securities view. Therefore, analysts of IIFL Securities lower their realisations assumption for FY24-26, resulting in 19-4% cut in EPS. While valuations at 12x FY24/25 P/E are not expensive, supply additions worldwide pose risk to the estimated earnings. Their SOTP-based TP rolled over to Dec’24 reduces from Rs950 to Rs930. Maintain REDUCE. 

Volumes stable, profitability down: 

Tata Chemicals (TCL) reported weaker-than-expected results, mainly due to lower profitability. While India suffered from cheaper imports despite healthy demand, soft demand in container glass and flat glass segment weighed on performance in other markets. TCL consolidated Ebitda missed IIFLe by 17% largely due to ~31% miss in standalone Ebtida. US business too reported weak profitability as profit from operations fell ~33% QoQ. Though domestic prices were stable, export realisation came under pressure. The profit for the quarter includes Rs1.02bn exceptional gain due to reversal of provision on account of settlement of long-pending entry tax dispute. 

Soda Ash market turning surplus: 

With the augmentation of several new capacities during 2023 and 2024, Soda Ash market seems to be turning surplus. 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 ~3.0mn tons in Inner Mongolia has come online and if demand in China remains weak the supplies will be diverted to exports. Thus the near term outlook on realisation remains weak. 

Earnings remain 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 have become vulnerable now.