Tata Chemicals: Gushing cash, but growth remains a challenge

23 Jun 2023 , 10:22 AM

Recommendation: Add; Target Price: Rs 980

 

Tata Chemical’s FY23 annual report (AR) highlights that despite elevated input and energy cost, higher than-expected demand coupled with supply constraints led to increased pricing, and helped TTCH deliver strong performance in FY23. While the company’s financials remain healthy, management acknowledges that rising global capacities in soda ash during FY24 may put pressure on soda ash prices. Analysts of IIFL Capital Services tweak their estimates downwards by 1%/3% for FY24/25. Their updated SOTP valuation indicates Sep’25 target price of Rs980 (down from Rs995). Besides, FY25 earnings could be at risk if prices see meaningful corrections, on the back of increasing supplies.

Strong FCF generation in FY23: 

TCL’s FCF jumped sharply to Rs12.6bn in FY23 vs Rs2.1bn in FY22, driven by rise in pre-tax profit to Rs27.4bn from Rs16.8bn. Increase in FCF was primarily led by subsidiaries operations, which increased to Rs14.8bn from Rs5.7bn. Consolidated debt fell to Rs62.6bn (down from Rs68.4bn YoY) as the company prepaid $155mn debt during FY23. Kenya has turned debt free after completely repaying the debt. TCNA debt of $80mn and TCE debt of £20mn was repaid during FY23.

Acknowledges rising global capacities: 

Capacity of 1.0mn tonne is expected to come online in the US in 2023 and another 1.5-2.0mn tonne in China by year end. This may put pressure on pricing in FY24. By CY30, China will add a 7.5mn tonne of natural soda ash in Inner Mongolia; US is also expected to add 5mn tonnes of natural soda ash capacity in stages. Annual report also notes that despite the announced capacity expansions of 17mn tonnes till CY30, there will be shortfall of 4mn tonnes based on growing demand.

Other nuggets from AR: 

1) AR mentions about developing sodiumbased energy storage solutions for next-generation batteries, but remains silent about plans to utilise over 127 acres of land in Dholera, Gujarat. 2) Believes that exit from ANSAC will increase direct connect with global customers. 3) TCEL commissioned and fully operationalised a 40,000 tpa carbon capture unit. 5) Market value of TCL’s listed investments has grown now to Rs49.8bn from Rs43.4bn, as on Mar’22.