Buy Tata Chemicals

India

Tata Chemicals

Fertilizers

Accumulate

CMP: 230

Target: 345

Investment Period: 1 year We initiate a Buy call on Tata Chemicals with a 50% upside potential on the stock from the current levels. Investment advice is based on very strong balance sheet, diversified businesses and strong Domestic Business for the company.

Priced on 12th JUNE, 2009 ±% potential

+50%

Highlights: Investment Arguments

Market Data Beta 52Wk hi/lo Market cap, INR Crore Shares in issue (mn.) Reuters Bloomberg

0.8903 375.50/99.70 5234 235.17 TTCH.BO TTCH@IN

Tata Chemicals has increased its production of its Barbala facility from 864,600 tonnes to 1.15 million tonnes. Urea production at the Barbala plant has stabilized at over 3,500 tonnes per day levels. The previous quarter saw the highest ever urea sales on the back of improved availability after debottlenecking the plant. Global Soda Ash Operations are running at 70-75% capacity due to sluggish global demand and 9% incentive to Chinese producers.

The company’s current news & future projects. 1.

2.

Share Holding Pattern (%) Promoters FII Domestic Inst. & Corp Body Public & Others

29.2 8.3 37.6 25.3

3.

Tata Chemicals Ltd expects demand to ease to 3.5-4 percent in FY10 from 5 percent last year as its overall growth rate comes down. th (Source- Reuters , 8 June 2009). Tata Chemicals would be investing 250 Crore FY10, 50 Crore in setting up a customised fertiliser plant at Barbala in the northern state of Uttar Pradesh in 2010 th and the rest in normal maintenance of assets. (Source- Reuters, Mumbai 28 May). Capital Outlay has been trimmed down from 500 Crore to Rs. 250 Crore due to anticipation of lower demand sighting general Economic Conditions. There will be increased Interest outgo as Company has started to repay loans for USD 300 million raised for expansion. Projections

Net Sales % Growth Operating Profit Interest & Depreciation PBT before EO and Min. interest EO PBT after EO before MI Net profit No. of shares EPS P/E BV

FY08

FY09

FY10E

FY11E

FY12E

6760 4 1184 436 748 478 1226 964 24 39 5.8 175

12160 106 1978 818 1160 230 1390 991 24 22 10.3 209

10944 -10% 1313 750 563 100 663 517 23.5 22.0 8.6 207

11820 8% 1891 750 1141 100 1241 931 24 39.6 5.7 237

13120 11% 2230 750 1480 100 1580 1185 24 50.4 4.5 276

Source: Fairwealth Research Estimates

Fairwealth Securities

Page 1

Buy: Tata Chemicals

Quarterly Result Round up: Q4 FY09

Net Sales Other Income Operating Operating Profit OPM Margin (%) Interest PBDT Depreciation PBT National Forex gain/loss PAT Extra-Ordinary PAT EPS

Q4 FY08

Y-o-Y Growth (%)

1894

1460

30

38

514

-93

236

246

0

13

17

114

39

190

161 108

722 79

-78 36

53

642

-92

290

-9

LP

343

633

-46

-234

-69

239

172

528

-67

99

101

-2

Source: Company Data, Capital Line

Result Analysis: Tata Chemicals posted excellent consolidated top-line growth of 30% to Rs 1,894.58 th Crore during the 4 quarter ended March 2009. Company’s global operations have faced strong headwinds, especially Soda Ash business which is expected to run at only 70-75% utilization, however domestic Businesses will do well. Year on Year numbers are not Comparable as last year Company had other Income of 514 Crore, on account of Sale of Investments

Full year performance: The consolidated top-line of the company for the full year ended March 2009 more than doubled to Rs 12,257.66 Crore mainly backed by the record growth in sale of urea during the year under review. OPM falling 230 bps to 16.1% during the year. Thus the absolute operating profit increased by 78% to Rs 1,978.34 Crore during the year. The interest cost and the depreciation allowance during the period increased by 189% and 35% to Rs 395.26 Crore and Rs 422.64 Crore respectively. Hence the profit before tax before forex gain/loss was flat at Rs 1,243.81 Crore during the year ended March 2009. The company's subsidiaries Brunner Mond, IMACID and GCIP posted decent growth during the year under review.

Fairwealth Securities

Page 2

Buy: Tata Chemicals

World’ second largest Soda Ash and third largest Sodium Bicarbonate producer. 12% market share in Urea Market among private players.

Tata Salt continues at number one position with market share of about 44%. Tata Salt Lite has become the market leader in the low sodium salt category within the first year of its launch

Company Description Established in 1939, Tata Chemicals Limited (TCL) is the world’s second largest producer of soda ash with manufacturing facilities in India, UK, Kenya and USA and total capacity of 5.5 MT Per Annum. Soda Ash production of Tata Chemicals has gone up from 0.9 MT in 2005 to 5.5MT in 2009. Almost all of the capacity increase has been led by inorganic Growth. Company is also world’s third largest manufacturer of Sodium Bi Carbonate. The company also manufacturers bulk chemicals like sulphuric acid, phosphoric acid, and Sodium Tripoly Phosphate (STPP). TCL is also India’s leading manufacturer of urea and phosphoric fertilizers and is the pioneer and India’s market leader in the branded, iodized salt segment. TCL has undertaken several key steps recently to leverage its expertise in chemistry and agriculture to develop high-tech and more sustainable products. It set up the TCL Innovation Centre in 2004 to develop world-class R&D capability in the emerging areas of nanotechnology and biotechnology. Leveraging its in-house research capabilities in biology and crop genomics, it is developing a significant presence in bio fuels space and is setting up a 30KL per day pilot plant at Nanded, in Maharashtra, which will use sweet sorghum as feedstock. TCL has also undertaken field research on Jatropha, a non-edible tree crop for biodiesel production. Most recently, its subsidiary, Tata Chemicals Asia Pacific Pte Ltd, entered into definitive agreements with JOil (Singapore) Pte Ltd. JOil, a Jatropha seedling company based in Singapore, set up by the Temasek Life Sciences Laboratory Ltd (TLL), along with other investors in Singapore.

Total NPK : Consumption(Thousand Tonnes)

Country Brazil China India United States

2006

Year 2005

2004

8878

8720

10655

50151

46668

43077

21652

20340

18400

20835

19273

20091

Source: CIA world Fact book

Total NPK : Production Year Country 2006 2005 Brazil 3117 2899 China 46127 42691 India 15513 15202 United States 15694 17762

Industry Potential: The Indian fertilizer industry with a capacity of 12.1 Million MT of nitrogen and 5.6 million MT of phosphoric nutrient is one of the largest in the world and has over the years, played a significant role in the development of agriculture in the country. Fertilizer consumption in India is among the highest in the world, however compared to total arable land in India, our Fertilizer usage per acre of Crop is less than all major agricultural nations. Considering the overall poor quality of Soil in most parts of India, India’s dependence on Fertilizers is ever Increasing. We expect Industry to grow by 6% over next 5 years, double our estimates for Agricultural Growth.

2004 3046 39379 15357 18217

Source: CIA world Fact book

Fairwealth Securities

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Buy: Tata Chemicals

The average phosphoric acid price for the th company during the 4 quarter was USD 760 per metric tonnes and the current price has fallen to USD 630 per metric tonnes.

Investment Advice: We are bullish on Indian Fertilizer sector as a whole Tata Chemicals is the safest bet in the sector due to its strong diversification in Chemicals and Food additives business. Stable Earnings and Revenues Visibility: Company has only 250 crores of Capital Expenditure planned for the year and not much capacity would be added in the near future. Thus Company’s top line and bottom line are expected to remain stable over next few years and not much variation would be seen. Company has 1438 Crores of Cash in hand (including Fertilizer Bonds of 444 crores). Operating cash flows are and will continue to remain healthy. Company has a very per share Book Value of Rs.172, thus P/V of only 1.3. Market Value for Quoted Equity stands at Rs. 750 crores, against cost of 142 crores.

Global Soda Ash Business is likely to continue face Challenges due to lower overall demand and 9% incentive from Chinese Government. Margins from this business (Brunner Mond and GCIP) will be impacted IN FY10.

Outlook and Valuation The company has plans to invest Rs 250 Crores in Capex this year.50 Crore would go into setting up a customised fertiliser plant in the Barbala plant in Uttar Pradesh in 2010. Rest of it would be utilized general maintenance work While margins might get impacted for overseas Operations (Soda Ash Busines), Indian Operations are expected to run smoothly for the Company. We give Company a buy on strong Balance Sheet and revenue visibility in the long term. We give stock a buy with a target price of 330 over a period 6 months to 1 year.

TECHNICAL OUTLOOK TATACHEM

TATACHEM is in a long term uptrend the stock has a good support at 220-200 area. Stock is a good buy on every dip for a Target of 308 in next 5-6 months.

Fairwealth Securities

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Buy: Tata Chemicals

Key Risks: Downside risks to our Investment calls are: (1) One of the major Risks for the stock is the price of Soda Ash. Company being world’s second largest Soda Ash producer with capacity of 5.5 MT, is highly dependent on Global prices and demand for Soda Ash, which is a raw material in Glass Industry. Industry is already facing lower global demand and running at 70% capacity, a deeper global recession will hit margins more than we have estimated. (2) Company is also one of the largest producer of Urea in the country, country however not much risks are reali realizable as India’s s fertilizer sector is saved from Global volatility as Domestic Fertilizer Industry in is protected from Government. India has imposed 20% Safegaurd duty on Imports from China, which are expected to continue for now. (3) One of the major costs for Fertilizer manufacturers is availability of Cheap Raw Energy resource, mainly Natural Gas and Naptha. While Barbala unit of TCL in Uttar Pradesh is the most efficient Fertilizer plant in the country. Availability of Cheap Energy is the major risk which can impact pro profitability of the Company.

Price Performance

Fairwealth Securities

Tata Chemicals is a low beta stock, with a beta of 0.9. Share has started underperforming the broader index, since October, while charts do not show any Extra Ordinary movement in the price, we believe the share will ride high pure based on its strong Fundamentals and its balance sheet. While results forr next 2 quarters can be sharply below expectations over a long term, share will give decent returns.

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Buy: Tata Chemicals

Annexure:

Income Statement: FY 07

FY 08

Margins

FY 06

INCOME : Net Sales

5982

5763

3993

702

170

155

75

-21

101

6759

5912

4249

2372

2339

1928

Power & Fuel Cost

939

764

422

Employee Cost

478

349

169

415

435

284

714

668

479

216

239

136

5133

4794

3416

Other Income Stock Adjustments Total Income EXPENDITURE : Raw Materials

Other Manufacturing Expenses Selling and Admin. Expenses Miscellaneous Expenses Total Expenditure Operating Profit Interest

1626

1118

833

137

96

48

Gross Profit

1490

1022

785

Depreciation

314

274

184

1176

748

601

211

240

172

964

508

428

964

508

428

Profit Before Tax Tax Net Profit before Minority Interest Net Profit after Minority Interest Extraordinary Items

382

-1

3

Adjusted Net Profit

583

509

426

Equity Dividend (%)

90

80

70

40

22

19

160

121

104

EPS after Minority Interest (Adj) (Unit Curr.) Book Value (Unit Curr.)

Key Margins

FY08

FY07

FY06

PBIDTM (%) PBITM (%) PBDTM (%) CPM (%) APATM (%) ROCE (%) RONW (%)

19.25 14 16.97 14.99 9.74 12.85 18.42

19.4 14.65 17.73 13.57 8.82 19.83 21.01

20.15 15.7 18.99 14.82 10.36 15.97 19.09

Operating Margins have decreased by only 100bps over last 3 years, going forward we expect these will contract sharply by 300 bps and 450 bps for FY09 and FY10E. We have estimated PBIDTM for FY 10 between 12% and 14%, margins are estimated to climb back to 16-17% for FY11. Next few years are expected to be years of Consolidation for the stock.

Source: Company Report, Capital Line

Fairwealth Securities

Page 6

Buy: Tata Chemicals Fund Flow Statement: 2008

2007

2006

Key ratios

SOURCES OF FUNDS Share Capital 234 Reserves Total 3499 Total Shareholders’ Funds 3733 Secured Loans 643 Unsecured Loans 4207 Total Debt 4850 Total Liabilities 8584 APPLICATION OF FUNDS Net Block 7754 Capital Work in Progress 266 Investments 417 Current Assets, Loans & Advances Inventories 930 Sundry Debtors 1200 Cash and Bank 677 Loans and Advances 621 Total Current Assets 3428 Less : Current Liabilities and Provisions Current Liabilities 1934 Provisions 1080 Total Current Liabilities 3014 Net Current Assets 1934 Net Deferred Tax -269 Total Assets 8584 Contingent Liabilities

389

215 2378 2593 862 1002 1864

215 2028 2243 462 1366 1828

4457

4071

3590 230 775

2928 559 547

635 966 154 258 2014

698 766 116 273 1853

1108 814 1922 1108 -234 4457

859 735 1594 859 -229 4071

349

1324

Key Ratios

FY08

FY07

FY06

Debt-Equity Ratio

1.06

0.76

0.81

Long Term DebtEquity Ratio Current Ratio

0.97

0.68

0.8

0.9

0.89

1

Turnover Ratios Fixed Assets Ratio

0.68

0.95

0.74

Inventory Ratio

7.64

8.64

5.92

Debtors Ratio

5.52

6.65

5.4

Interest Cover Ratio

6.13

8.78

13.47

Debt Equity: Company’s Debt Equity ratio has been rising as new Debt’s has been raised to acquire new Companies in US. However overall situation remains comfortable as Debt Equity will remain around 1.5 and Net Debt to Equity Ratio will remain around 1. Inventory Turnover: Company has achieved higher Cash flow utilization and Operational efficiencies by increasing Inventory Turnover Ratio. Interest Coverage Ratio: Interest Coverage Ratio will fall to around 4 for FY09 and FY10, however that is manageable and won’t hit Companies balance sheet or Profitability.

Source: Company Report, Capital Line

Cash Flow Statement: 2008 Cash and Cash Equivalents at Beginning of the year Net Cash from Operating Activities Net Cash Used in Investing Activities Net Cash Used in Financing Activities Net Inc/(Dec) in Cash and Cash Equivalent Cash and Cash Equivalents at End of the year Source: Company Report, Capital Line

Fairwealth Securities

2007

2006

94

46

752

481 -1797

677 -16

246 -877

1499

-613

-75

183

48

-706

278

94

46

Page 7

Buy: Tata Chemicals Coverage: Our Stock coverage and Returns:

BUY REPORTS: Stock

Target

Set Date

Price as on Call date

Target Price

Stock

Sensex

Price on 26th may

Stock

% return absolute

Stock

% return Relative to Sensex

Sensex

Educomp

22-Jan-09

2750

1715

8814

2,861.10

66.83%

57.85%

8.98%

Havells

30-Jan-09

280

115

8325

281

144.35%

67.12%

77.22%

Jaiprakash Associates

12-Feb-09

110

73

9466

185.6

154.25%

46.98%

107.27%

Lupin

03-Feb-09

780

630

8607

862.6

36.92%

61.65%

-24.73%

Tata Steel

06-Mar-09

250

152

8325

368.7

142.57%

67.12%

75.44%

M&M

12-Mar-09

440

345

8344

633.8

83.71%

66.74%

16.97%

51

Unitech

25-Mar-09

34

9667

77.15

126.91%

43.92%

82.99%

Punj Lloyd

30-Mar-09

120/145

85

9549

179.8

111.53%

45.70%

65.83%

Sintex Industries

16-Apr-09

240

137

10,947

218.5

59.49%

27.09%

32.39%

Alok Industries

26-Apr-09

28

14

11,371

21

50.00%

22.36%

27.64%

SELL REPORTS: Stock

Bharat Electronics Ltd

Target

21-May-09

Price as on Call date

1059

1319

Price on 26th may

% return absolute

% return Relative to Sensex

13,736 1,343.55

Note: Based on 25th May 2009 Sensex closing of 13,913 Note: All calls are initial/ first time calls Note: All reports can be accessed on our website under http://www.fairwealth.in/Research.aspx

Note: Fundamental and Technical reports are independently given and investors are advised to take their decision based on their investment profile and holding periods.

Fairwealth Securities

Page 8

Buy: Tata Chemicals

Disclaimer This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed to be reliable; investors are advised to satisfy themselves before making any investments. Fairwealth Securities Pvt Ltd does not bear any responsibility for the authentication of the information contained in the reports and consequently, is not liable for any decisions taken based on the same. Further, Fairwealth Research Reports only provide information updates and analysis. All opinion for buying and selling are available to investors when they are registered clients of Fairwealth Investment Advisory Services. As a matter of practice, Fairwealth refrains from publishing any individual names with its reports. As per SEBI requirements it is stated that, Fairwealth Sec Pvt Ltd., and/or individuals thereof may have positions in securities referred herein and may make purchases or sale while this report is in circulation.

Fairwealth Securities

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