Inc

Table of Contents

Rpt. 12890544 27-Nov-2007

TATA CHEMICALS LTD - INITIATING COVERAGE ABN AMRO BANK - ATTAVAR, ABHIJIT

2 - 34

Rpt. 12891621 21-Nov-2007

TATA CHEMICALS LTD - INITIATING COVERAGE ANGEL BROKING LIMITED - NAGRAJ, ROHIT

35 - 49

These reports were compiled using a product of Thomson Financial.

www.thomson.com/financial

1

DISCLAIMER  Copyright 2005 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO"). All rights reserved. This material was prepared by the ABN AMRO affiliate named on the cover or inside cover page. It is provided for informational purposes only and does not constitute an offer to sell or a solicitation to buy any security or other financial instrument. While based on information believed to be reliable, no guarantee is given that it is accurate or complete. While we endeavour to update on a reasonable basis the information and opinions contained herein, there may be regulatory, compliance or other reasons that prevent us from doing so. The opinions, forecasts, assumptions, estimates, derived valuations and target price(s) contained in this material are as of the date indicated and are subject to change at any time without prior notice. The investments referred to may not be suitable for the specific investment objectives, financial situation or individual needs of recipients and should not be relied upon in substitution for the exercise of independent judgement. ABN AMRO or its officers, directors, employee benefit programmes or employees, including persons involved in the preparation or issuance of this material, may from time to time have long or short positions in securities, warrants, futures, options, derivatives or other financial instruments referred to in this material. ABN AMRO may at any time solicit or provide investment banking, commercial banking, credit, advisory or other services to the issuer of any security referred to herein. Accordingly, information may be available to ABN AMRO, which is not reflected in this material, and ABN AMRO may have acted upon or used the information prior to or immediately following its publication. Within the last three years, ABN AMRO may also have acted as manager or co-manager for a public offering of securities of issuers referred to herein. The stated price of any securities mentioned herein is as of the date indicated and is not a representation that any transaction can be effected at this price. Neither ABN AMRO nor other persons shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material. This material is for the use of intended recipients only and the contents may not be reproduced, redistributed, or copied in whole or in part for any purpose without ABN AMRO's prior express consent. In any jurisdiction in which distribution to private/retail customers would require registration or licensing of the distributor which the distributor does not currently have, this document is intended solely for distribution to professional and institutional investors. Australia: Any report referring to equity securities is distributed in Australia by ABN AMRO Equities Australia Ltd (ABN 84 002 768 701, AFS Licence 240530), a participant of the ASX Group. Any report referring to fixed income securities is distributed in Australia by ABN AMRO Bank NV (Australia Branch) (ABN 84 079 478 612, AFS Licence 238266). Australian investors should note that this document was prepared for wholesale investors only. Canada: The securities mentioned in this material are available only in accordance with applicable securities laws and may not be eligible for sale in all jurisdictions. Persons in Canada requiring further information should contact ABN AMRO Incorporated. Hong Kong: This document is being distributed in Hong Kong by, and is attributable to, ABN AMRO Asia Limited which is regulated by the Securities and Futures Commission of Hong Kong. India: Shares traded on stock exchanges within the Republic of India may only be purchased by different categories of resident Indian investors, Foreign Institutional Investors registered with The Securities and Exchange Board of India ("SEBI") or individuals of Indian national origin resident outside India called Non Resident Indians ("NRIs") and Overseas Corporate Bodies ("OCBs"), predominantly owned by such persons or Persons of Indian Origin (PIO). Any recipient of this document wanting additional information or to effect any transaction in Indian securities or financial instrument mentioned herein must do so by contacting a representative of ABN AMRO Asia Equities (India) limited. Italy: Persons in Italy requiring further information should contact ABN AMRO Bank N.V. Milan Branch. Japan: This report is being distributed in Japan by ABN AMRO Securities Japan Ltd to institutional investors only. New Zealand: This document is distributed in New Zealand by ABN AMRO NZ Limited an accredited NZX Firm. Russia: The Russian securities market is associated with several substantial risks, legal, economic and political, and high volatility. There is a relatively high measure of legal uncertainty concerning rights, duties and legal remedies in the Russian Federation. Russian laws and regulations governing investments in securities markets may not be sufficiently developed or may be subject to inconsistent or arbitrary interpretation or application. Russian securities are often not issued in physical form and registration of ownership may not be subject to a centralised system. Registration of ownership of certain types of securities may not be subject to standardised procedures and may even be effected on an ad hoc basis. The value of investments in Russian securities may be affected by fluctuations in available currency rates and exchange control regulations. Singapore: Any report referring to equity securities is distributed in Singapore by ABN AMRO Asia Securities (Singapore) Pte Limited (RCB Regn No. 198703346M) to clients who fall within the description of persons in Regulation 49(5) of the Securities and Futures (Licensing and Conduct of Business) Regulations and Regulations 34 and 35 of the Financial Advisers Regulations. Any report referring to non-equity securities is distributed in Singapore by ABN AMRO Bank NV (Singapore Branch) Limited to clients who fall within the description of persons in Regulations 34 and 35 of the Financial Advisers Regulations. Investors should note that this material was prepared for accredited investors only. Recipients who do not fall within the description of persons under Regulation 49(5) of the Securities and Futures (Licensing and Conduct of Business) Regulations or Regulations 34 and 35 of the Financial Advisers Regulations should seek the advice of their independent financial advisor prior to taking any investment decision based on this document or for any necessary explanation of its contents. United Kingdom: All research is distributed by ABN AMRO Bank NV, London Branch, which is authorised by De Nederlandsche Bank and by the Financial Services Authority; and regulated by the Financial Services Authority for the conduct of UK business. The investments and services contained herein are not available to private customers in the United Kingdom. United States: Distribution of this document in the United States or to US persons is intended to be solely to major institutional investors as defined in Rule 15a6(a)(2) under the US Securities Act of 1934. All US persons that receive this document by their acceptance thereof represent and agree that they are a major institutional investor and understand the risks involved in executing transactions in securities. Any US recipient of this document wanting additional information or to effect any transaction in any security or financial instrument mentioned herein, must do so by contacting a registered representative of ABN AMRO Incorporated, Park Avenue Plaza, 55 East 52nd Street, New York, N.Y. 10055, US, tel + 1 212 409 1000, fax +1 212 409 5222. - Material means all research information contained in any form including but not limited to hard copy, electronic form, presentations, e-mail, SMS or WAP.

Regulatory disclosures _________________________________________________________________________________________________________________________________ The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts. _________________________________________________________________________________________________________________________________ For a discussion of the valuation methodologies used to derive our price targets and the risks that could impede their achievement, please refer to our latest published research on those stocks at www.abnamroresearch.com. Disclosures regarding companies covered by ABN AMRO group can be found on ABN AMRO's research website at www.abnamroresearch.com. Should you require additional information please contact the relevant ABN AMRO research team or the author(s) of this report.

2

Produced by: ABN AMRO Asia Securities (Singapore) Pte Ltd Tuesday 27 November 2007

Initiation of coverage

Tata Chemicals

Buy Absolute performance

n/a

A value play on Indian agri sector

Short term (0-60 days)

We believe the next leg of India's growth story lies in the rural and agricultural sector. We see Tata Chemicals as a play on this, it being India's leading fertiliser producer and an early mover in developing a distribution chain reaching out to India's farmers.

Neutral Market relative to region Chemicals

India Price

Rs307.00

Key forecasts

Target price

Rs450.00

FY06A

FY07A

FY08F

FY09F

FY10F

40344.2

58096.0

59941.5

65350.7

71930.5

EBITDA (Rsm)

7518.2

10066.5

10876.5

12662.5

14133.3

Reported net profit (Rsm)

4283.4

5080.4

6674.8

7145.2

8284.6

Normalised net profit (Rsm)¹

4257.8

5045.6

5412.4

7145.2

8284.6

Normalised EPS (Rs)

17.5

20.7

22.2

29.4

34.1

Rs35.85m (US$0.88m)

Dividend per share (Rs)

7.98

9.36

10.1

11.8

13.6

Reuters

Bloomberg

Dividend yield (%)

2.60

3.05

3.28

3.83

4.44

TTCH.BO

TTCH IN

Normalised PE (x)

17.6

14.8

13.8

10.4

9.00

EV/EBITDA (x)

11.3

8.47

7.14

5.96

5.19

Price/book value (x)

3.38

2.91

2.07

1.84

1.64

ROIC (%)

18.6

12.9

13.4

15.3

16.7

Revenue (Rsm)

1. Post-goodwill amortisation and pre-exceptional items Accounting Standard: Local GAAP Source: Company data, ABN AMRO forecasts

Market capitalisation

Rs68.15bn (US$1.72bn) Avg (12mth) daily turnover

year to Mar, fully diluted

Forget the clutter; focus on the structural strengths TCL's business model has too many moving parts with a presence across diverse but not so glamorous sectors such as soda ash, branded edible salt and fertilisers. In our view, this is precisely the reason the stock has stayed below the radar of mainstream investors and trades at a significant discount to India's Sensex despite being the third-largest producer of soda ash in the world today and India's leading fertiliser producer and distributor, as well as having a strong management pedigree. A play on growth in India's agricultural sector Over 740m Indians live in villages and nearly 230m of those work in farming, which still contributes 20% of India's GDP. We believe the next leg of India's growth story will have to involve raising agricultural productivity and TCL is a play on this structural trend. TCL is not only one of the most energy-efficient urea manufacturers in India, but also has strong brands in phosphatic and complex fertilisers. Even more interesting are TCL's plans to reach out to over 2.5m farmers through its distribution network of Tata Kisan Sansars, a one-stop shop for farmers. TCL's investment portfolio has a lot of hidden value TCL holds strategic investments in other Tata group companies, which are carried at a historical cost of Rs2.8bn in its balance sheet. On our estimates, the current fair value of these investments is close to Rs47bn, ie, close to Rs200 per share or 65% of the stock's current market price. A value pick for the Indian markets TCL currently trades at FY09F P/E of 10.4x and P/B of 1.8x, a near 50% discount to the BSE Sensex, despite having a comparable FY09F ROE of 17.7% and FY07-09F EPS CAGR of 19% on our estimates. TCL's valuations look well-supported by its FY09F equity free cash flow yield of 6.7% and dividend yield of 3.8%. We value TCL's core business at Rs90bn using a three-stage DCF model and add the value of its investment portfolio at a 30% holding company discount to get a target price of Rs450 per share, implying upside of 47% from current levels.

Important disclosures can be found in the Disclosures Appendix. Priced at close of business 23 November 2007.

Price performance (1M)

(3M) (12M)

Price (Rs)

321.0

235.8

227.1

Absolute %

-4.4

30.2

35.2

Rel market %

-4.4

-2.4

-3.8

Rel sector %

6.1

26.6

1.9

Nov 04

Dec 05

Dec 06

500 400 300 200 100 TTCH.BO

Sensex

Stock borrowing: Difficult Volatility (30-day): 32% Volatility (6-month trend): ↑ 52-week range: 340.00-187.05 Sensex: 19247.54 BBG AP Chemicals: 270.71 Source: ABN AMRO, Bloomberg

Analyst Abhijit Attavar Singapore +65 6518 7881 [email protected]

www.abnamroresearch.com

Permit No. MICA (P) 210/06/2007, Level 21, One Raffles Quay, South Tower, 048583, Singapore

3

The Basics Key assumptions We forecast Tata Chemicals’ revenues for inorganic chemicals and fertilisers will

Versus consensus

achieve FY07-10 CAGRs of 6.3% and 8.7% pa respectively. We expect inorganic

Normalised

chemicals margins to dip from 16.9% in FY07 to 14.1% in FY08 due to temporary

profit

production problems at Mithapur before recovering to 17.5% in FY10. On fertilisers,

ABN

(Rsm)

we expect the margin recovery seen in 1H08 to continue. With the Babrala plant

AMRO

FY08F

Cons % diff

5,412 5,689 -4.9%

expansion due to come through by 2H09, we have projected fertiliser margins will

FY09F

7,145 6,847

reach around 15% for FY09 and FY10.

FY10F

8,285

4.4%

N.A

Source: Reuters, ABN AMRO forecasts

How we differ from consensus We have tried to estimate the fair value of TCL’s investment portfolio. On our estimates, the portfolio is worth Rs47bn, ie, nearly Rs200 per share or about 66% of TCL’s current market price. We believe consensus may be failing to reflect the true value of TCL’s strategic investments.

Key events Date

Event

End Jan’08 3rd quarter Fy08 results

Valuation and target price

Source: Company

We value TCL’s core business at Rs90bn using a three-stage DCF model with WACC of 9.9%. This implies an FY08F EV/EBITDA of 7.1x for the core business which seems reasonable to us. We add to that our fair value for TCL’s investment portfolio at a 30% holding company discount. Using the fully-diluted equity base of 243m shares, we arrive at our target price of Rs450 per share.

Catalysts for share price performance

Forced ranking*

We believe TCL’s market price has not adequately reflected the value of the

Upside /

company’s investment portfolio. A gradual realisation of this value and any potential

Company

moves to unlock the value of some of the less strategic holdings like TCS could lead

Tata Chemicals

Buy

47%

to a re-rating. Also, any positive changes in government fertiliser policy to incentivise

Punj Lloyd

Buy

29%

private sector investments would improve sentiment for TCL.

Tata Steel

Buy

24%

Maruti Suzuki

Buy

9%

Risks to central scenario

Thermax

Buy

-9%

Rec Downside

* by difference to target price as at time of publication. Recommendations may lie outside the structure outlined in the disclosure page Source: ABN AMRO forecasts

Any adverse changes in soda ash prices due to weakening of the commodity cycle could affect TCL’s inorganic chemical margins. Also, any adverse changes in India’s fertiliser policy that affect the returns of private-sector producers and distributors could affect TCL’s profitability. Finally, any further delay in paying the fertiliser subsidy to producers could impact TCL’s working capital requirements and increase

Volatility (30-day)

its interest costs.

80 % 70 % 60 % 50 % 40 % 30 % 20 % 10 % Jan 03

Oct 03

Aug Jun Apr Feb 04 05 06 07

Nov 07

Source: Bloomberg

TATA

CH EMI CAL S

27

NOVE MBE R

20 07

2

4

Key assumptions and sensitivities Table 1 : Key assumptions and projections Rsm

FY05A

FY06A

FY07A

FY08F

FY09F

FY10F

Inorganic chemicals

11,353

16,896

31,513

30,697

33,767

37,819

Fertilisers

18,728

23,285

26,583

29,244

31,584

34,110

Total sales

30,081

40,181

58,096

59,941

65,351

71,929

Inorganic chemicals

2,223

3,863

5,323

4,335

5,572

6,618

Fertilisers

2,078

2,422

2,728

4,455

4,738

5,117

4,301

6,285

8,050

8,789

10,309

11,735

543

607

723

700

700

700

3,758

5,678

7,328

8,089

9,609

11,035

Inorganic chemicals

19.6%

22.9%

16.9%

14.1%

16.5%

17.5%

Fertilisers

11.1%

10.4%

10.3%

15.2%

15.0%

15.0%

14.3%

15.6%

13.9%

14.7%

15.8%

16.3%

Turnover

Segmental profit

Total segment profit less allocated other income Total operating profit Operating margins

Blended margin Turnover

30,081

40,344

58,096

59,941

65,351

71,929

Cost of sales

-13,998

-18,265

-23,606

-23,753

-26,794

-29,491

Gross profit

16,084

22,079

34,490

36,188

38,557

42,438

Depreciation and amortisation

-1,377

-1,840

-2,739

-3,053

-3,053

-3,097

Employee cost

-1,064

-1,489

-3,480

-4,151

-4,575

-5,035

Other operational expenses Total Operating expenses

-9,864

-13,026

-20,904

-21,161

-21,320

-23,271

-12,326

-16,402

-27,162

-28,365

-28,998

-31,453

3,758

5,678

7,328

7,824

9,609

11,035

EBIT Non-operating income/ (expenses) - net Profit before EX items XO Items - (expenses)/income - net EBIT (after XO items) Finance expense Profit before taxation Taxation Profit after tax

709

808

943

1,115

1,200

1,201

4,466

6,486

8,270

8,938

10,809

12,236

309

26

35

1,262

0

0

4,775

6,511

8,305

10,201

10,809

12,236

-246

-505

-824

-998

-885

-734

4,529

6,007

7,481

9,203

9,924

11,501

-1,124

-1,723

-2,401

-2,528

-2,779

-3,220

3,406

4,283

5,080

6,675

7,145

8,281

Working Capital (days of sales) Inventory

59

63

40

40

40

40

Receivables

53

69

61

70

75

80

-55

-74

-57

-60

-60

-60

58

59

44

50

55

60

9,259

20,580

20,221

12,646

10,492

8,452

0.46

0.93

0.79

0.35

0.26

0.19

Creditors Net working capital (days) Net debt/ (cash) (Rsm) net debt/ equity Source: Company data, ABN AMRO forecasts

Table 2 : Sensitivity table Change in operating profit (Rsm)

Change in operating profit (%)

FY08F

FY09F

FY10F

FY08F

FY09F

Drop in inorganic chem margins by 1ppt

307

338

378

3.9%

3.5%

FY10F 3.4%

Drop in fertiliser margins by 1ppt

292

316

341

3.7%

3.3%

3.1%

Source: ABN AMRO estimates

TATA

CH EMI CAL S

27

NOVE MBE R

20 07

3

5

Contents I NVES T MENT

VIEW

Forget the clutter; focus on value and the long-term story

5

We agree that TCL has an unexciting business model with potentially too many moving parts. However, we believe therein lies the opportunity to pick up a play on India’s agricultural sector at attractive valuations. PERF ORMA NCE

A ND

VA LU ATIO N

A value play

10

At the current market price of Rs307 per share, TCL’s valuations look attractive to us, particularly if we adjust for the fair value of its investment portfolio. We have an SOTP-based target price of Rs450 per share. CO MPA NY

DYNA MI CS

Unexciting, but solid business model

11

We expect TCL’s inorganic chemicals and fertiliser business to show moderate topline growth with relatively stable margins. A well-managed working capital cycle and low capex leads to strong cash-flow generation. I NDUST RY

DY NA MI CS

Soda ash; building global scale in a commodity sector

15

With the acquisition of Brunner Mond, TCL now has global scale in soda ash in addition to being a leading player in India. TCL is benefiting from a relatively strong commodity cycle in soda ash. SE CT OR

DY NA MI CS

Fertilisers; a critical input to India’s agrarian sector

17

Policy controls and regulatory uncertainty have led to private investment in fertiliser sector drying-up since 1990s. A new agri-policy that tackles the subsidy burden and also encourages private investments is called... RIS K

A NA LYS IS

Risk analysis

20

TCL’s key business risks are cyclical risks associated with the soda ash sector and policy risks in the fertiliser segment. A PPE NDIX

New agri-business model – reaching out to India’s farmers

21

TCL is an early mover in establishing a distribution chain to supply agri-inputs to India’s farmers as well as procuring fresh farm produce from them. TCL’s Tata Kisan Sansars currently reaches about 2.5m farmers. Valuing TCL’s investment portfolio

23

TCL’s investment portfolio includes about Rs2.8bn of strategic investments in group companies carried at historical cost. At current market levels, we estimate this investment portfolio could be worth over Rs43bn. Peer group valuations

25

TCL’s current valuations appear to be in line with headline multiples of its peer group. However, its investment portfolio, management pedigree and liquidity make it stand out from its peer group, in our view.

TATA

CH EMI CAL S

27

NOVE MBE R

20 07

4

6

I N V E S T M E N T

V I E W

Forget the clutter; focus on value and the long-term story We agree that TCL has an unexciting business model with potentially too many moving parts. However, we believe therein lies the opportunity to pick up a play on India’s agricultural sector at attractive valuations.

Too many moving parts; why even consider investing in Tata Chemicals? We believe the common perception of Tata Chemicals among investors is that the

TCL’s business model has too many moving parts…

business model has too many moving parts with presence in too many diverse product categories ranging from soda ash to fertilisers to branded edible salt (See Chart 1 below). To add to that, the fertiliser sector in India is heavily government regulated with controls on pricing, manufacturing and distribution, as well as formulabased returns on capital making the model even more opaque to investors. TCL is clearly not the easiest of business models to analyse or keep track of. Chart 1 : Tata Chemicals product mix (FY07) H2So4 1%

NPK 18%

Soda Ash 21%

Soda Bicarb 2%

SSP 2%

Caustic Soda 0.4% Bromine 0.5% Salt 9%

DAP 13%

Cement 5%

STTP 5%

Urea 24%

Source: ABN AMRO, TCL 2007 annual report

In our view, this presents an opportunity for the more patient, meticulous investor.

...as a result of which it has been below the radar for most mainstream India investors

The company has been below the radar for most mainstream investors looking for India exposure (FII holding of just under 6%, at the low end for liquid India stocks), with only six brokers to date covering the stock. As a result, while TCL’s share price has doubled over last three years, it has still underperformed the Sensex, which has risen nearly 280% over this period.

TATA

CH EMI CAL S

27

NOVE MBE R

20 07

5

7

IN VESTM ENT

VI EW

Chart 2 : Though Tata Chemical shares have doubled since Nov-04…

Chart 3 :.. it has still lagged the broader move in the Sensex

400

350

350

300

300

250

250

200

200

150

150

100

100

50 0

50

Jan-05

Jul-05

Jan-06

0 Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-06

TTCH

Jul-07

Source: ABN AMRO, Bloomberg

Jan-07

Jul-07

SENSEX

Source: ABN AMRO, Bloomberg

Below, we present three key reasons why we decided to cover this stock and why we think it would be worth your while to read the rest of this report and get to grips with the fundamentals of Tata Chemicals.

1) Attractive valuations supported by strong cashflows Tata Chemicals is a low-profile, unfancied stock, relative to the leading Indian companies, and trades at a hefty discount to the Sensex which we find hard to justify on the basis of fundamentals alone. As seen in Table 3 below, Tata Chemicals trades at nearly 40% P/E discount to the Sensex despite having a similar growth profile and

TCL's valuation discount to the Sensex is hard to explain on fundamentals alone…

a hefty 60% P/B discount to the Sensex despite an ROE which is pretty close to the broader Sensex ROEs, based on IBES consensus. Table 3 : TCL trades at a substantial valuation discount to the Sensex FY08F P/B

FY08F ROE

Tata Chemicals (@ Rs307)

FY07A P/E 14.8

13.8

18.5%

2.1

15.0%

3.2%

BSE Sensex (@ 18,800)

25.3

22.6

14.7%

5.6

22.0%

0.8%

-41%

-40%

valn discount

FY08F P/E EPS CAGR (FY07-09F)

FY08F div. yield

-60%

Source: ABN AMRO, Bloomberg, IBES

More importantly, Tata Chemicals has strong value support in the form of a dividend FY08F yield of 3.2% compared to the average dividend yield of 0.8% for the Sensex in FY08F. We estimate Tata Chemicals will generate an equity free cash flow of Rs5bn

TCL's valuations are backed by strong free cash flow generation

in FY08F, which implies an equity fcf yield of 6.7%, based on the current market cap of Rs70bn. In our view, the company’s cash-flow generation potential should provide strong downside value support to the stock even if the broader Sensex valuations are at risk of change in investor sentiment towards India.

2) A play on structural changes in India’s agri sector Investors seeking exposure to the India growth story have largely focused on the high-growth IT services sector or infrastructure and urban consumption plays, most of which are now trading on fairly rich valuations. We believe the next leg of the India growth story has to be inclusive of India’s rural population and its agricultural sector. There are still 740m people living in rural India, (70% of India’s population) with over 235m directly employed in agriculture, which contributed nearly 20% to India’s GDP in FY07.

We believe the next leg of the India growth story has to include the agricultural sector…

Hence, both from a political and economic perspective, raising agricultural productivity has to be a critical part of India’s long-term economic development. Improving agricultural yields will not only benefit a substantial section of India’s TATA

CH EMI CAL S

27

NOVE MBE R

20 07

6

8

IN VESTM ENT

VI EW

population but is also critical to maintaining India’s domestic food security and feeding a large segment that is gradually rising above the poverty line. We, therefore, believe companies that supply agri-inputs – HYV seeds, pesticides and fertilisers will be key beneficiaries of this structural drive to improve agricultural yields. As Chart 4 below shows, fertiliser usage has a fairly strong impact on crop

…companies which help boost agricultural productivity should benefit

yields and is one of the critical inputs to India’s agri-industry. Chart 4 : Fertilisers are a key input in raising crop yields 120

1900

110

1800 1700

100

1600 90 1500 80

1400

Fertilizer intensity (kg/ha)

2006-07E

2005-06

2004-05

2003-04

2002-03

2001-02

2000-01

1999-00

1998-99

1200 1997-98

60 1996-97

1300

1995-96

70

Foodgrain yield (Kg/ha)

Source: ABN AMRO, Fertilisers Association of India

From a historical perspective, the fertiliser sector in India has been heavily regulated

Fertiliser imports are rising because of lack of private investment in domestic capacity

and this has proved to be a deterrent to private investment. With the private sector putting up no greenfield capacity, India’s domestic fertiliser production is now falling well short of its consumption requirements and the country is today one of the largest net importers of fertilisers in the global market. Chart 5 : Minimal increase in urea/DAP capacity 25,000

Chart 6 : … has led to rising imports of urea/DAP 4,500 4,000 3,500

20,000

3,000 2,500

15,000

2,000 1,500

10,000

1,000 500

5,000

0 (500)

0 FY02A

FY03A

FY04A

FY05A

Urea

FY06A

FY07A

FY02A

FY03A

FY05A

Urea

DAP

Source: ABN AMRO, Fertilisers Association of India

FY04A

FY06A

FY07A

DAP

Source: ABN AMRO, Fertilisers Association of India

Long term, government policy will need to incentivise private sector investment to bridge this gap and ensure steady growth in fertiliser production in India. An interesting point to note here is, that under the current regulated pricing regime,

Depreciated plants like TCL get lower returns under current fertiliser policy…

operating margins paid to urea producers are based on 12% post-tax return on capital on their depreciated asset bases. We estimate Tata Chemicals whose Babrala plant was set-up in 1994 gets an operating margin or return on capital base of around Rs1200 to Rs1500 per tonne after passing through input/ manufacturing costs.

TATA

CH EMI CAL S

27

NOVE MBE R

20 07

7

9

IN VESTM ENT

VI EW

We estimate capital cost per tonne for a new urea plant in India today would be

Returns for existing plants could rise if fertiliser pricing is decontrolled

Rs25,000 to Rs30,000. To make a greenfield venture economically viable with at least 10-12% returns, the net operating margin after input/manufacturing costs has to be Rs2,500 to Rs3,600 per tonne, well above what depreciated plants like TCL are getting under the current regulated regime. Players like Tata Chemicals should benefit from any moves towards liberalising the current administered pricing mechanism in fertilisers. Another interesting development is Tata Chemicals’ recent initiative to develop a rural distribution network under the Tata Kisan Vikas Kendra (TKVK) scheme (see

TCL is expanding its rural distribution network…

Appendix I for details). With about 40 TKVKs and over 800 franchisee TKS’s in operation, this is one of the largest rural distribution networks in India, reaching out to over 27,000 villages and 2.5m farmers (comparable to ITCs e-choupal network). This network not only distributes agri-inputs like seeds, pesticides and, of course,

...in order to sell agri-inputs to farmers as well as source fresh farm produce from the farm gate

fertilisers to farmers but also provides soft services like weather forecasting, microcredit and access to new farming technology. Tata Chemicals has also formed a JV with Total, Europe, to collect fresh produce from the farmers and distribute it to supermarkets, cold storages etc. We believe this distribution strategy makes Tata Chemicals a clear first mover in tapping into the agricultural supply chain and a potential beneficiary of increased investment in India’s agriculture sector.

3) Investment portfolio has more value than perceived The FY07 annual report of Tata Chemicals shows investments of Rs7.7bn on its

The book value of TCL’s investment portfolio is just Rs7.7bn…

consolidated balance sheet. This may seem insignificant given Tata Chemicals’ current mcap of Rs70bn. Tata Chemicals was incorporated in 1939 and, so, is one of the oldest companies in

… however, our estimated fair value is close to Rs47bn…

the Tata group. As a result of this history, it carries lot of small minority stakes in Tata group companies on its books. These long-term investments are carried on its balance sheet at historical costs. So while the Rs7.7bn portfolio of investments includes Rs4.9bn of investments in liquid assets like cash mutual funds, which are more or less marked close to fair value, it also includes long-term investments that have a book value of Rs2.8bn, but whose fair value is closer to Rs47bn as shown in table 3 below on the basis of current market prices and imputed fair value. The total value of cash & equivalents works to nearly Rs200 per share, or 65% of

...which amounts to nearly Rs200 per share or 65% of current market cap

Tata Chemicals current mcap. Of particular significance in this exercise is the stake in unlisted group holding company Tata Sons, which is being carried at a historical cost of Rs0.5bn, but whose current fair value is closer to Rs25bn (for details refer to Appendix II). Table 4 : Estimating fair value of TCL’s investment portfolio Book value (Rs m)

Market value (Rs m)

Long-term investments Fully paid ordinary equity share - quoted

1,360

15,772

Fully paid ordinary equity shares - unquoted

1,472

25,661

Cumulative redeemable pref shares - unquoted

450

450

3,282

41,884

Current investments Unquoted equity shares Quoted bonds/Units Unquoted units Unquoted mutual funds Total investments

3

3

236

387

1

1

4,234

4,234

4,473

4,624

7,755

46,508

Source: ABN AMRO estimates, Bloomberg

TATA

CH EMI CAL S

27

NOVE MBE R

20 07

8

10

IN VESTM ENT

VI EW

We concede that the bulk of these investments are long-term strategic stakes in group companies and that Tata Chemicals is unlikely to unlock their value by selling them any time soon. That said, management has indicated that, should there be a substantive cash call on Tata Chemicals in the future, it would consider offloading some of the more liquid stakes like Tata Consultancy Services. So, while it might be appropriate to take a 25-30% discount to the fair value of the investments, the bigger point we are making is that carrying the investment portfolio at historical costs on the balance sheet has probably led to Tata Chemicals share price not reflecting the true value of its investment portfolio.

TATA

CH EMI CAL S

27

Even with a holding company discount of 30%, these investments are a significant value contributor

NOVE MBE R

20 07

9

11

P E R F O R M A N C E

A N D

V A L U A T I O N

A value play At the current market price of Rs307 per share, TCL’s valuations look attractive to us, particularly if we adjust for the fair value of its investment portfolio. We have an SOTP-based target price of Rs450 per share.

We have a sum-of-the-parts value of Rs450 per share We value TCL at Rs450 per share

We value Tata Chemical’s core business operations at Rs90bn using a three-stage DCF model. This implies a FY09F EV/EBITDA of 7.1x for the business, which seems intuitively reasonable. We have added the investment portfolio at conservative 30% holding company discount to the fair value. We have also assumed that Tata Chemicals CBs, which are convertible into shares at Rs225 per share, will be fully converted and have taken the fully diluted share base. This leads us to a fair value of Rs450 per share as shown in table below Table 5 : Sum-of-the-parts based on three-stage DCF for the core business Economic Profit Valuation Adjusted Opening Invested Capital NPV of Economic Profit During Explicit Period NPV of Econ Profit of Remaining Business (1, 2)

Rs m

Rs per share

43,171

178

5,111

21

28,507

117

Remarks

NPV of Econ Profit of Net Inv (Grth Business) (1, 3)

13,411

55

Enterprise Value

90,200

371

Implies FY09F EV/ EBITDA of 7.1x

Plus: Other Assets

33,709

139

At 30% discount to fair value

Less: Net Debt/Leases (as at 23 Nov 2007)

12,646

52

111,263

458

Equity Value No. Shares (millions)

243

Per Share Equity Value

450

Assuming full conversion of CBs

Source: ABN AMRO estimates

Valuations look attractive at current market price As seen from the table below, Tata Chemicals valuations are looking attractive at the current market price. In particular, if you take the enterprise value of the business after stripping value of investments with a 30% holding company discount, the

Valuations look even more attractive when adjusted for fair value of investments

adjusted FY09F EV/EBITDA is just 4.2x and adjusted P/E is just 6.9x. Table 6 : Valuations look attractive; even more so when adjusted for investments FY05A

FY06A

FY07A

FY08F

FY09F

P/E

24.1

17.5

14.8

13.8

10.4

P/B

3.7

3.4

2.9

2.1

1.8

2.3%

2.6%

3.0%

3.3%

3.8%

Dividend yield (EV less inv)/ EBITDA

10.4

7.1

5.3

4.9

4.2

Adjusted P/E (less inv)

17.1

11.9

10.0

9.5

6.9

Source: ABN AMRO estimates, Bloomberg

TATA

CH EMI CAL S

27

NOVE MBE R

20 07

10

12

C O M P A N Y

D Y N A M I C S

Unexciting, but solid business model We expect TCL’s inorganic chemicals and fertiliser business to show moderate top-line growth with relatively stable margins. A well-managed working capital cycle and low capex leads to strong cash-flow generation.

Two key segments – inorganic chemicals and fertilisers The business profile of Tata Chemicals Limited (TCL) can be divided into two key

Inorganic chemicals and fertilisers are the two key product segments for TCL

business segments – inorganic chemicals and fertilisers – each of which contribute half of consolidated sales. Soda ash is the main component of the inorganic chemicals business. TCL has an integrated soda ash plant in Mithapur, Gujarat, and has dominant share of more than 30% in India’s soda ash market. In 2005, TCL acquired the Brunner Mond group – which has production facilities in UK, Holland and Magadi, Kenya – to become the third-largest soda ash manufacturer in the world. TCL’s cement plant was set-up to handle the effluents coming out of its soda ash

Inorganic chemicals include soda ash and its byproducts

complex. Cement production in FY07 was just about 0.5m tons and cement accounted for just over 5% of total consolidated sales. TCL is also the leader in packaged branded edible salt in India with a market share of nearly 47%. While this segment accounted for just Rs3.3bn of sales in FY07 (about 9% of total consolidated sales), it has solid potential for long-term growth as just under 25% of the household salt consumption in India is currently branded. Chart 7 : Revenue split across two key product segments 50%

80,000

45%

70,000

40%

60,000

35%

50,000

30%

40,000

25% 20%

30,000

15%

20,000

10%

10,000

5% 0%

0 FY05A

FY06A

FY07A

Inorganic chem

FY08F Fertilisers

FY09F

FY10F

yoy

Source: Company data, ABN AMRO forecasts

In the fertiliser segment, TCL operates a 0.9mtpa urea plant in Babrala, Uttar

In fertilisers, TCL has presence across urea as well as phosphates and complex fertilisers

Pradesh. Babrala is a dual-feed plant (can use both naphtha and natural gas) and is currently the most energy-efficient urea plant in India. In 2003, TCL acquired from HLL the phosphatic fertiliser (DAP, NPK, SSP) business, which includes the manufacturing facility at Haldia, West Bengal, and the Paras brand which has a market share of nearly 40-50% in its command areas. TCL also imports and distributes phosphatic and complex fertilisers. It has established a JV in Morocco called Indo-Maroc Phosphore S.A (IMACID) to secure supplies of rock phosphate and phosphoric acid, a critical raw material for making phosphatic

TATA

CH EMI CAL S

27

NOVE MBE R

20 07

11

13

COMPAN Y

DYNAM I CS

fertilisers. Morocco is the largest producer of rock phosphate and phosphoric acid in the world and controls nearly 50% of world exports.

Tata Chemicals; operating margins along product segments Chart 8 below shows TCL’s operating margins based on consolidated sales along

We expect soda ash margins to dip in FY08 due to technical problems in production…

product lines. The company’s domestic soda ash margins (20-25%) are higher than those achieved at the overseas soda ash operations of the Brunner Mond group (1012%). The acquisition of Brunner Mond at end-2005 has, therefore, diluted the overall margins of the inorganic chemicals business. We expect FY08 inorganic chemicals margins to drop further as TCL’s operations in Mithapur were hit by heavy rains in 1H08 which affected the brine quality and by operational problems with the natural soda ash kiln in Magadi, Kenya. However, once

...but to recover heading into FY09 as commodity cycle is still strong

these operational issues are resolved and pricing on soda ash contracts catches up with rising spot prices, we expect a gradual recovery in the soda ash margins. Chart 8 : Operating margins along product segments 25.0%

20.0% 15.6%

16.3%

15.8%

14.7%

13.9%

15.0% 14.3% 10.0%

5.0%

0.0% FY05A

FY06A

FY07A

Inorganic chemicals

FY08F

FY09F

Fertilisers

FY10F

Blended margin

Source: ABN AMRO estimates, Company data

Margins in the fertiliser segment are expected to improve following the new freight equalisation policy announced in 1H08 and the move to calculate subsidy on a monthly basis rather than quarterly basis should improve fertiliser operating margins

Fertiliser margins have improved with recent changes in govt. policy

as evidenced in the 1H08 results. Overall, on a blended basis, we expect TCL’s FY08-10 operating margins to remain relatively steady at 15-16% and operating profit to be driven largely by volume growth as seen in Chart 9 below Chart 9 : TCL’s operating profit trend – steady volume-driven growth 12,000

60%

10,000

50% 40%

8,000

30% 6,000 20% 4,000

10%

2,000

0%

0

-10% FY05A

FY06A

FY07A Operating profit

FY08F

FY09F

FY10F

yoy

Source: ABN AMRO estimates, Company data

TATA

CH EMI CAL S

27

NOVE MBE R

20 07

12

14

COMPAN Y

DYNAM I CS

Capex targeted largely at de-bottlenecking/upgrading of existing units TCL is budgeting to around Rs1.5bn over two years for the debottlenecking of its Babrala urea plant, which will increase name-plate capacity from 0.85mpta to around 1.2mtpa. It will also be spending another Rs1.5bn-2bn on upgrading its Mithapur

Capex of Rs3.5bn pa largely for debottlenecking of capacity

complex by adding more captive power units and increasing capacity from 0.9mtpa to 1.2mtpa. Also, TCL has budgeted Rs1.5bn for new business initiatives which include Tata Kisan Kendras, the JV with Total for fresh produce, and the new bio-fuel initiatives. Adding normal maintenance capex of Rs0.5-1bn per annum, the total capex requirement comes to around Rs3.5bn per annum over FY08-09F, which is only slightly above the company’s annual depreciation charge of Rs3bn.

A relatively well-managed working capital cycle TCL has maintained relatively tight control of its working capital cycle with net

Working capital has been relatively well-managed

working capital requirement dropping to just 45 days in FY07. Chart 10 : Well-managed working capital cycle (in days of sales) 100

70

80

60

60 50

40 20

40

0 30

-20 -40

20

-60 10

-80 -100

0 FY05A Inventory

FY06A

FY07A Receivables

FY08F Creditors

FY09F

FY10F

net working capital (RHS)

Source: ABN AMRO estimates, Company data

The key risk here is any delays in reimbursement of fertiliser subsidy from the government. The outstanding fertiliser subsidy was Rs5.7bn as of March 07 and that actually dropped to Rs4.7bn by September 07. However, if the fertiliser subsidy bill keeps rising, delayed payments might be a risk.

Strong free cash-flow generation from core business With capex levels over FY08-10F broadly tracking depreciation expense and a

TCL's free cash flow generation should be strong enough to reach Rs5bn in FY09F

relatively well-managed working capital cycle averaging around 50-60 days, Tata Chemicals looks well-positioned to translate its reported earnings into strong free cash flow generation (as seen in Chart 11). The free cash flow generation is more than adequate to cover a steady rise in the dividend pay-out (as seen in Chart 12)

TATA

CH EMI CAL S

27

NOVE MBE R

20 07

13

15

COMPAN Y

DYNAM I CS

Chart 11 : Strong free cash flow generation (FY08-10F)… 15,000 10,000

Chart 12 : …should support a rising dividend payout 8,000

8,000

6,000

6,000

4,000

4,000

2,000

5,000

2,000

0

0

-2,000

0

-2,000

-4,000 -5,000

-4,000

-6,000

-6,000

-8,000

-10,000

-8,000

-10,000

-10,000

-12,000

-15,000 FY05A

FY06A

FY07A

FY08F

FY09F

FY10F

-12,000 FY05A

PAT + Deprn.

Change in NWC

Capex + Acquisitions

Free Cash Flow

FY06A

FY07A

Dividends (Rsm)

Source: Company data, ABN AMRO forecasts

FY08F

FY09F

FY10F

Free Cash Flow (Rsm)

Source: Company data, ABN AMRO forecasts

A strong balance sheet TCL raised US$150m in the form of CBs to fund its acquisition of Brunner Mond in FY06. With the CBs well in the money (conversion at Rs225), we expect most of them to be converted into shares by end-FY08. With further deleveraging coming from cash generated by the business, we expect net debt-equity to drop to 0.35x by FY08 and a

We expect net debt-equity to drop after the peak hit during the Brunner Mond acquisition

further to 0.2x by FY10F giving TCL the balance sheet flexibility to take on future acquisitions or expansion programmes. Chart 13 : Net debt-equity should drop to 0.35x by FY08F 1.00

25,000

0.90 20,000

0.80 0.70

15,000

0.60 0.50

10,000

0.40 0.30

5,000

0.20 0.10

0

0.00 FY05A

FY06A

FY07A

Net debt (Rsm)

FY08F

FY09F

FY10F

Net debt/ equity (RHS)

Source: ABN AMRO estimates, Company data

TATA

CH EMI CAL S

27

NOVE MBE R

20 07

14

16

I N D U S T R Y

D Y N A M I C S

Soda ash; building global scale in a commodity sector With the acquisition of Brunner Mond, TCL now has global scale in soda ash in addition to being a leading player in India. TCL is benefiting from a relatively strong commodity cycle in soda ash.

Soda ash; a fragmented commodity sector globally Soda Ash (commercial name “Sodium carbonate”) finds applications mainly in the

On a global basis, soda ash is a commodity product

production of detergents, glass, chemicals, sodium silicate, pulp & paper and water treatment. About 27% of global production of soda ash comes from natural sources while the bulk of it is manufactured synthetically. On TCL’s estimates, global demand stood at 37mtpa growing at about 4-5% pa, while capacity was nominally at 42mtpa. China and USA are the world’s major suppliers of soda ash.

TCL has become the third-largest global supplier after acquiring the Brunner Mond group Realising that scale and cost-competitiveness is critical in the commoditised soda ash market, TCL decided to acquire the Brunner Mond group at end-2005. Brunner Mond

TCL is now the third largest soda ash producer globally

has 1.3mtpa of synthetic soda ash capacity in UK and Holland and also 0.7mtpa of natural soda ash capacity in Magadi, Kenya, which is the second largest production base of natural soda ash globally. Natural soda ash has a production cost of half of that of synthetic soda ash.

TCL is the market leader in India with over 30% market share Per capita consumption of soda ash in India is low (2.7kg) compared to China (9.8kg) and USA (22kg). We expect domestic demand of around 2.8m MT to grow at at least 80% of the GDP growth rate. The detergents & soap and glass industries are the two

TCL has over 30% market share in a five-player market in India

major consumers of soda ash in India and consume 32% and 21% of the country’s production respectively. There are five main producers of Soda Ash in India: TCL, GHCL, DCW Limited, Nirma and Tuticorin Alkalies. TCL has an integrated soda ash complex at Mithapur, Gujarat, with a capacity of 0.9mtpa, which makes it the market leader with about 30% share of the domestic market.

Duty protection for soda ash industry has been dropping Basic customs duty on soda ash in India has dropped sharply over the last decade

Duty levels have dropped, but imports have yet to make a big impact

from 65% in FY95 to 7.5% in FY07. While net imports have risen, as a result, total net imports of soda ash are still less than 10% of total consumption.

TATA

CH EMI CAL S

27

NOVE MBE R

20 07

15

17

IN DUST RY

D YNAMI CS

Chart 15 : Imports are rising but still a small portion of consumption

Chart 14 : Duty protection has dropped 70%

0.30

60%

0.25

50%

0.20

40%

0.15

30%

0.10

20%

0.05

40 35 30 25 20 15 10 5

Import volume in lacs MT

Source: ABN AMRO, Chemical Association of India forecasts

2006-07E

2005-06

2004-05

2003-04

2002-03

2000-01

2007-08F

2006-07E

2005-06

2004-05

2003-04

2002-03

2001-02

2000-01

1999-00

1998-99

1997-98

1996-97

1995-96

0% 1994-95

0 2001-02

-

10%

Import duty %

Source: ABN AMRO, Chemical Association of India forecasts

Domestic ex-factory realisations have been on the rise A strong global economy has seen rising capacity utilisation for soda ash plants globally and consequently rising global prices. Manufacturers in China face increased environmental concerns and might not add capacity as aggressively as before. This

Domestic prices have risen in sync with a strong global soda ash market

has resulted in a rising trend in ex-factory realisations for domestic producers and with spot soda ash prices continuing to rise, we expect newer long-term contracts for soda ash to be marked further upwards. Chart 16 : Domestic ex-factory realisations on the rise 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 Apr-97

Apr-98

Apr-99

Apr-00

Apr-01

Apr-02

Apr-03

Apr-04

Apr-05

Apr-06

Apr-07

Source: ABN AMRO, Tata Chemicals

Power and infrastructure are key bottlenecks for Indian producers India has an abundant supply of the raw materials, viz, limestone & salt for soda ash manufacture. The industry, however, suffers from high power costs as 95% of plants are in Gujarat where power prices are among the highest in the country. TCL is trying

Domestic producers need to access low-cost power to cut production costs

to get around the power bottleneck by setting up more captive power capacity at its Mithapur complex. High concentration in Gujarat poses one more challenge, viz, logistics. Given that

Logistics is another key cost element

around 60% of domestic demand comes from regions other than Gujarat, the industry is highly dependant on reliable and cost-effective transport (12-13% of the landed price is towards the logistics cost).

TATA

CH EMI CAL S

27

NOVE MBE R

20 07

16

18

S E C T O R

D Y N A M I C S

Fertilisers; a critical input to India’s agrarian sector Policy controls and regulatory uncertainty have led to private investment in fertiliser sector drying-up since 1990s. A new agri-policy that tackles the subsidy burden and also encourages private investments is called for.

Global fertiliser industry; Asia is now the key demand centre As seen from Chart 17 below, global fertiliser consumption was about 147mtpa in 2004 and has been growing at an average of 3% pa over the last decade. Over half of the global consumption of fertilisers is now in Asia with India and China accounting

India/China are key players in the global fertiliser market

for the major share. Chart 17 : Global fertiliser consumption

Chart 18 : Asia is biggest consumer of fertilisers

160,000

5%

140,000

4% 3%

120,000

2%

100,000

1%

80,000

Latin America 10%

Others 8%

0% -1%

60,000

-2%

40,000

-3%

20,000

-4%

N

P2O5

K2O

Asia 54% N America 14%

2003-04

2002-03

2001-02

2000-01

1999-00

1998-99

1997-98

1996-97

-5% 1995-96

0

Europe 14%

growth (yoy)

Source: ABN AMRO, FAI

Source: ABN AMRO, FAI

India can further improve its fertiliser usage India consumed about 40m tonnes of fertilisers in FY06, representing nearly 25% of

India's fertiliser usage is still below norm

global consumption. However, the country still consumes only 98kg of nutrients per hectare of arable land compared to 254kg in China, 301kg in Japan and 407kg in Korea. Other developing nations, including Pakistan and Bangladesh, have higher consumption per hectare at 135kg and 156kg respectively. Therefore, there is a lot of scope to increase this consumption.

However, the fertiliser industry is heavily regulated The fertiliser industry in India is heavily regulated with the government controlling almost every leg of the supply chain. Farm-gate prices are set by the government and it, in turn, repays the manufacturers the difference between the production costs

India's fertiliser industry is saddled with heavy government controls…

and farm-gate prices through complex subsidy reimbursement programmes. Urea manufacturers are allowed to pass through normative input costs and are reimbursed capital costs at the rate of 12% post-tax return on capital.

Policy uncertainty has led to minimal investment in new production capacity Given the prevailing uncertainty over regulated returns, availability of feedstock

...which has led to dryingup of private investment

(natural gas) as well gas pricing and pass-through of input costs, private sector investment in fertiliser capacity has started to dry up over the last decade. As a TATA

CH EMI CAL S

27

NOVE MBE R

20 07

17

19

SE CTO R

DYNAM I CS

result, the domestic demand-supply gap has widened leading to a sharp increase in fertiliser imports over the last 4-5 years. Chart 19 : Urea demand-supply

Chart 20 : DAP demand-supply

30,000

9,000

6,000

8,000

5,000

25,000

2,500

2,000

7,000 4,000

20,000

6,000

3,000

5,000

2,000

4,000

15,000 10,000

1,500

1,000

3,000

1,000

2,000

5,000

0

0

(1,000) FY02A

FY04A

FY06A

Demand

FY08F

Supply

500

1,000 0

FY10F

0 FY02A

Imports

FY04A

FY06A

Demand

Source: ABN AMRO forecasts, FAI

FY08F Supply

FY10F Imports

Source: ABN AMRO forecasts, FAI

Control on farm-gate prices has led to increased subsidy burden and a distorted consumption ratio Urea prices have been regulated at Rs4,830 per ton since early 2003.

Urea prices have not risen since 2003...

Chart 21 : Urea prices have not been raised since Jan 2003 5,500 5,000 4,500 4,000 3,500 3,000 2,500

Jan-07

Jan-06

Jan-05

Jan-04

Jan-03

Jan-02

Jan-01

Jan-00

Jan-99

Jan-98

Jan-97

Jan-96

Jan-95

Jan-94

Jan-93

Jan-92

2,000

Farmgate price (Rs./tonne) Source: ABN AMRO, FAI

In recent times, CIF prices of imported urea have reached nearly US$350 per tonne, ie, landed costs of over Rs13,000 per tonne. Local manufacturers like Tata Chemicals are paid retention prices based on pass-through input costs (natural gas prices are

... and are now well below ex-factory as well as import parity prices...

controlled) and a fixed return of 12% on their depreciated capital base. We understand Tata Chemicals’ retention price would average Rs7,500-8,000 per tonne based on current input costs with a fixed return on capital of Rs1,200-1,500 per tonne. With a rising differential between farm-gate prices and prices paid for imports and

... leading to a rising fertiliser subsidy bill

domestic manufacturers the fertiliser subsidy bill is on the rise as seen in Chart 22 below.

TATA

CH EMI CAL S

27

NOVE MBE R

20 07

18

20

SE CTO R

DYNAM I CS

Chart 22 : A rising fertiliser subsidy bill 250

1.20% 1.00%

200

0.80% 150 0.60% 100 0.40% 50

0.20%

Amount of subsidy (Rsbn)

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

1984

0.00% 1983

0

Subsidy/GDp ratio

Source: ABN AMRO, Union Budget FY07

Also, as urea prices have been fixed at Rs4,830 per tonne versus Rs.9,350 for DAP and even higher levels for complex fertilisers, the consumption mix in India has been skewed a lot more in favour of urea. India’s N:P:K usage ratio stands at 6:2.5:1 vs the global norm of 4:2:1.

Agri-policy in India needs a radical breakthrough As we discussed earlier, politically and economically, it is imperative that India steps

India needs to attract private investment to lift agricultural productivity

up investment in its agricultural productivity. The government has limited resources to do this (fertiliser and food subsidies have risen sharply in recent years) and, hence, it is important to attract private investment capital, technology and entrepreneurship into the agricultural sector in India. Fertilisers are a critical agri-input from a farmers perspective. There has been little

Lack of capacity creation in fertilisers has led to rising imports and a higher subsidy bill

private-sector investment in this space due to the uncertainty on long-term government policy, pricing of inputs like natural gas and rates of return payable to efficient domestic producers. In the meantime, demand growth and stagnant supply have led to increased import dependence in India, which is now one of the largest importers of urea in the world; this, in itself, is impacting traded global fertiliser prices. Rising landed costs of imports are only adding to India’s fertiliser subsidy bill. Bottom line, while there could be short-term set-backs to private fertiliser producers, due to populist policies, long-term strategic policy requires healthy private sector participation in India’s fertiliser industry. As we have discussed before, a total deregulation of fertiliser pricing could actually raise the capital returns of depreciated plants in the private sector. On the flip side, India also needs to modernise its network for distributing agri-inputs to farmers and procuring farm produce from the farm gate. The public distribution system is inefficient and the unorganised middleman network creams too much from margins in the agri-supply chain. We believe TCL’s TKS network is ideally placed to

India also needs to modernise its rural distribution and procurement network; first movers here should benefit

capture opportunities arising out of the need to modernise India’s agri-supply chain.

TATA

CH EMI CAL S

27

NOVE MBE R

20 07

19

21

R I S K

A N A L Y S I S

Risk analysis TCL’s key business risks are cyclical risks associated with the soda ash sector and policy risks in the fertiliser segment.

Rising subsidy bill could put pressure on working capital According to industry sources, total outstanding balance of fertiliser subsidy

Rising subsidy bill may impact TCL's balance sheet and interest costs

receivable by the industry from the government was about Rs150bn, of which TCL’s share as of March 07 was about Rs5.6bn. An increase in the amount of subsidy receivable would put pressure on TCL’s working capital needs and give rise to interest costs. There have been talks about the outstanding subsidy being paid in the form of a “fertiliser” bond as with the oil sector, but the exact modalities have not been worked out. In our financial models, we have assumed a moderate expansion in TCL’s net receivable days from 61 days in FY07 to 70 in FY08. Note that TCL’s outstanding subsidies had actually fallen to Rs4.7bn by Sep 07 from Rs5.7bn in Mar 07.

Policy risks with fertiliser segment The fertiliser sector is heavily regulated in India. Every aspect from sourcing of inputs to manufacturing and distribution is controlled and private players are paid a fixed

Fertiliser segment could be exposed to policy risks

return on capital, based on certain normative parameters. There is a risk that any changes in policy regarding the calculation of these norms can affect the returns of private players like TCL. While we acknowledge these risks in the short-term, it would be important to note that this policy uncertainty has already acted as a significant deterrent to fresh private sector investment in fertilisers over the last decade as a result of which India’s import dependence has been rising. So from a long-term strategic perspective, government policy cannot afford to risk alienating private sector investment by providing them with unremunerative returns.

Cyclical risks associated with soda ash segment Soda ash is a global commodity with India representing less than 7-8% of global

Soda ash, being a commodity, is exposed to cyclical risks

consumption. Duty protection levels in India have dropped sharply, which leaves the country vulnerable to dumping from China and US, the two largest manufacturers in the world. While this is a possibility in future, currently global demand-supply is fairly well balanced and environmental concerns associated with the chlor-alkali industry have kept a lid on excessive supply creation across the globe. We expect the current strength in the soda ash cycle to last till FY09. Moreover, TCL has now built global scale with the acquisition of Brunner Mond and its natural soda ash facility in Magadi, Kenya, has a lower cost of manufacturing than synthetic soda ash. We expect further streamlining of costs at the Brunner Mond unit and expansion of capacity at Magadi. The increase of captive power facilities at TCL’s Mithapur plant in India and debottlenecking of capacity should further increase cost-competitiveness.

TATA

CH EMI CAL S

27

NOVE MBE R

20 07

20

22

A P P E N D I X

New agri-business model – reaching out to India’s farmers TCL is an early mover in establishing a distribution chain to supply agriinputs to India’s farmers as well as procuring fresh farm produce from them. TCL’s Tata Kisan Sansars currently reaches about 2.5m farmers.

Tata Kisan Vikas Kendras seems a promising initiative In line with our belief that the next stage of growth in the Indian economy will

TCL is building a distribution network to stay ahead of structural changes in rural India

require structural changes in the rural and agriculture sector, TCL is positioning its agri-business model to reach out to the Indian farmer and take advantage of these trends. TCL has set-up a network of Tata Kisan Vikas Kendras (TKVK) using a hub-and-spoke model. TKVKs are owned by TCL and act as a distribution-cum-farmer training centres and covers up to 20 Tata Kisan Sansars (TKSs), which are based on a

Its TKS network currently reaches out to over 2.5m farmers

franchise model. Each TKS covers about 60 villages. Currently, TCL has about 40 TKVKs, which control nearly 800 TKS’s, reaching out to over 27,200 villages and 2.5m farmers. Chart 23 : Tata Kisan Vikas Kendras – a hub & spoke distribution model Village

Village TKS Covers ~ 40 villages & 4800 farmers Village

Village Tata Kisan Vikas Kendra (HUB) 1. 2. 3. 4. 5. 6.

TKS Covers ~ 40 villages & 4800 farmers

Village

Farmers’ training centre Soil testing lab Farmers libraray Warehouse Demo farms 3 -4 acres land

TKS Covers ~ 40 villages & 4800 farmers

Village

Controls 20 TKS

Tata Kisan Sanasar (TKS) Sells products – Seeds, fertilizers, pesticides, agricultural tools Renders services – soil testing, crop loans, advisory

Village

Village

Source: ABN AMRO, Tata Chemicals annual report

TATA

CH EMI CAL S

27

NOVE MBE R

20 07

21

23

APP ENDI X

TKS will be a one-stop shop for farming needs The TKS network runs crop clinics where agronomists use computers to access

TKS is a one-stop shop for farmers needs..

information from the geographic information system (GIS) and advise farmers on what to grow, where and when to grow it, and how much urea and nutrients to use. At the soil-testing laboratory, technicians analyse soil samples to determine their composition and confirm what the satellite maps have indicated. Additionally, the TKS network operates experimental farms where scientists conduct agricultural research and development. TKSs also stock seeds, pesticides and fertilisers that farmers can buy at affordable

.. both for purchasing agriinputs like seeds, pesticides etc…

prices, and they lease out farm equipment and implements to farmers who cannot afford to buy expensive modern machinery. One of the biggest worries for small farmers in India is finance. The sansars take care of this need too. Farmers can get credit, insure their crops against natural disasters, and even benefit from buyback facilities. Staff members at each sansar are equipped to find solutions to every agriculturerelated problem. A well-stocked library of journals and magazines helps farmers keep abreast of news and the latest global developments. In addition, the sansars mail regular bulletins on farm-related news to subscribers. The training halls at the TKS are used for workshops and the screening of films related to agriculture. The sansars also have exhibition halls where special events — educational, social or just pure entertainment — are held for members of the Tata Kisan Sahyog Parivar, an organisation promoted by the TKS network to build relationships with farmers and their families.

Leveraging the distribution network to source fresh farm produce While the TKS network is a distribution chain for supplying agri-inputs to farmers, it can also be used to source fresh farm produce for sale in modern supermarket chains. TCL has entered into a JV with Total, Europe, to set up a chain of cold-storage and distribution facilities for up-streaming farm produce to the retail chains. We

... but also to eventually source fresh farm produce for processing and selling to retail consumption centres

estimate India’s farm produce market is worth over US$40bn pa and currently most of it is being sold in informal “mandis” (rural marketplaces) with poor storage, transportation and logistics facilities. The middlemen, including traders and villagelevel distributors, cream off a big chunk of profits in the agricultural supply chain.

TATA

CH EMI CAL S

27

NOVE MBE R

20 07

22

24

APP ENDI X

Valuing TCL’s investment portfolio TCL’s investment portfolio includes about Rs2.8bn of strategic investments in group companies carried at historical cost. At current market levels, we estimate this investment portfolio could be worth over Rs43bn.

Book value of investments only a fraction of likely market value TCL's investment book of Rs7.7bn has liquid assets worth Rs4.9bn

As per TCL’s FY07 annual report, the company carries about Rs7.7bn of investments on its books. Of this, Rs4.9bn is largely liquid assets comprising instruments like cash mutual funds, which we estimate have a market value close to the book value. The remaining Rs2.7bn comprises strategic investments in Tata group companies, which have been shown at historical costs in the book. Of these strategic investments, the book value of quoted investments is about

Investments in listed group companies which have a book value of Rs1.36bn but current market value of Rs15.7bn

Rs1.36bn and those of unquoted investments is about Rs1.4bn. Based on current market prices, the strategic investments like listed shares in Tata Motors, TCS etc are now worth Rs15.8bn as seen in Table 7 below. Table 7 : Market value of TCL’s listed investments Book value (Rs m)

No of shares ( in m)

CMP (Rs)

Market value (Rs m)

Tata Steel Limited

502.6

3.11

820.5

2,551

Tata motors limited

114.7

0.60

714.65

431

Tata tea Limited

160.9

4.32

776.6

3,353

Titan industries Limited

223.9

1.50

1439.65

2,162

Tata Investmetns corpn Limited

103.4

5.30

672.1

3,560

1.4

2.31

960

2,215

Rallis India Limited

190.6

1.13

460.4

518

Oriental hotels

47.90

0.43

351.25

152

Madras fertilizers limited

4.9

0.33

14.95

5

Indian Hotels Limited

9.9

6.01

137.4

826

Tata Consultancy Services Limited

Total value of investments

1,360

15,772

Source: ABN AMRO estimates, Bloomberg

Of the non-quoted investments, the most interesting is 10,237 shares in Tata Sons

TCL's investment in unlisted Tata Sons alone has a fair value of Rs25bn

with a book value of Rs0.5bn. We estimate Tata Sons has a fair value per share of Rs2.5m based on its holdings (see Table 8 below), which leads to TCL’s investments in Tata Sons having a fair value of Rs25bn. We have not attempted to value other non-quoted investments like Tata Industries and Tata Tele-services on the basis of materiality. Table 8 : Estimating the fair value of Tata Sons and TCL’s holding in it Mcap (Rs m)

% holding

Holding value (Rs m)

939,456

75.98%

713,799

82,832

12%

9,849

275,490

21.92%

60,388

Tata Steel

599,595

23.03%

138,087

VSNL

149,768

8.51%

12,745

Tata Chemicals

68,239

14.89%

10,161

Tata Tea

48,025

22.78%

10,940

Titan

63,905

9%

5,668

Voltas

72,778

24%

17,314

TCS Indian hotels Tata Motors

Tata Elxsi

7,524

38%

2,871

Trent

10,265

26%

2,665

Rallis

5,516

8%

415

Tata Investment Corp

20,284

45%

9,028

Tata Teleservices

90,482

18%

16,386

Value of Tata Sons holding (Rs mn)

1,010,315

less estimated debt in Tata Sons (Rsm)

20,000

No of shares in Tata Sons

400,000

Value per share Rs.

2,475,788

Value of 10,237 shares (Rsbn)

25.3

Source: ABN AMRO estimates, Bloomberg TATA

CH EMI CAL S

27

NOVE MBE R

20 07

23

25

APP ENDI X

Adding the two together, we estimate the total fair value of TCL’s investments to be

Overall, we estimate fair value of TCL's investment portfolio is nearly Rs47bn

Rs47bn, well above the carrying value of Rs7.7bn on TCL’s books. We believe consensus tends to overlook the fair value of this investment portfolio. Table 9 : TCL’s investment portfolio has a total fair value of close to Rs47bn Book value (Rsm)

Market value (Rsm)

Market value (US$m)

Fully paid ordinary equity share - quoted

1,360

15,772

394

Fully paid ordinary equity shares - unquoted

1,472

25,661

642

450

450

11

3,282

41,884

1,047

Long term investments

Cumulative redeemable pref shares - unquoted Current investments Unquoted equity shares Quoted bonds/Units Unquoted units Unquoted mutual funds

Total investments

3

3

0

236

387

10

1

1

0

4,234

4,234

106

4,473

4,624

116

7,755

46,508

1,163

Source: ABN AMRO estimates, Bloomberg

We concede that as most of these stakes are strategic holdings in other Tata group companies, TCL is unlikely to unlock value and realise cash from them anytime soon. So while we would consider taking a 30% discount to estimated value as being fair, we consider it inappropriate to totally ignore the value of strategic holdings in estimating the fair value of TCL, as the market seems currently to be doing.

TATA

CH EMI CAL S

27

NOVE MBE R

20 07

24

26

APP ENDI X

Peer group valuations TCL’s current valuations appear to be in line with headline multiples of its peer group. However, its investment portfolio, management pedigree and liquidity make it stand out from its peer group, in our view.

Ex-investments, TCL trades at a discount to its peer group The table below shows TCL’s valuations relative to Indian fertiliser companies, agrichemical companies and manufacturers of industrial chemicals. As seen below, TCL’s headline P/E and EV/ EBIT multiples seem to be inline or even at a small discount to the composite peer group. However, if you were to strip out TCL’s value of investments (even at a 30% discount to fair value), TCL’s adjusted FY08F EV/ EBIT would be just 6.8x and adjusted P/E would be just 9.5x, a big discount to its peer group. Note that TCL’s strong management pedigree and its higher liquidity should also warrant a premium to its peer group even on a headline basis, in our view. Table 10 : TCL’s valuations vs peer group Market cap

CMP

EV/ EBIT

P/E

P/E

P/B

(US$m) (US$m/day) (Rs per share)

Liquidity

(FY07A)

(FY07A)

(FY08F)

(FY07A)

P/B

ROE

(FY08F) computed

GODAVARI FERT

129

0.02

161

9.6

10.5

Na

3.8

Na

37%

DEEPAK FERTIL

314

0.81

142

12.5

13.7

10.8

1.9

1.7

14%

EID PARRY INDIA

348

0.22

156

10.5

7.0

15.6

1.5

2.9

21%

GUJARAT NARM VLY

654

1.10

168

6.6

8.0

8.5

1.8

1.6

23%

NATL FERTILIZERS

967

0.23

79

17.0

22.0

Na

2.8

Na

13%

344

0.32

1,593

24.8

19.5

Na

3.7

Na

19%

1,723

1.64

325

26.2

23.3

17.9

4.1

3.2

17%

MONSANTO INDIA UNITED PHOSPHORU

GUJARAT FLUOROCH

885

0.13

611

13.4

14.6

Na

5.0

Na

34%

HIKAL LTD

158

0.06

420

26.8

29.4

9.9

4.6

2.9

16%

HINDUSTAN ORGAN

114

1.37

68

147.8

26.9

Na

2.8

Na

10%

1,707

3.41

307

12.1

14.8

13.8

2.9

2.1

18%

TATA CHEMICALS

Priced as of close on 23 November 07 Source: ABN AMRO forecasts for Tata Chemicals, Bloomberg forecasts for peer group

TATA

CH EMI CAL S

27

NOVE MBE R

20 07

25

27

DISCLOSURES APPENDIX

TATA

CH EMI CAL S

27

NOVE MBE R

20 07

26

28

DISCLOSURES APPENDIX

TATA

CH EMI CAL S

27

NOVE MBE R

20 07

27

29

DISCLOSURES APPENDIX

Recommendation structure Absolute performance, short term (trading) recommendation: A Trading Buy recommendation implies upside of 5% or more and a Trading Sell indicates downside of 5% or more. The trading recommendation time horizon is 0-60 days. For Australian coverage, a Trading Buy recommendation implies upside of 5% or more from the suggested entry price range, and a Trading Sell recommendation implies downside of 5% or more from the suggested entry price range. The trading recommendation time horizon is 0-60 days. Absolute performance, long term (fundamental) recommendation: The recommendation is based on implied upside/downside for the stock from the target price. A Buy/Sell implies upside/downside of 10% or more and a Hold less than 10%. For listed property trusts (LPT) or real estate investment trusts (REIT) the recommendation is based upon the target price plus the dividend yield, ie total return. This structure applies to research on Asian and European stocks published from 1 November 2005; on Australian stocks from 7 November 2006; on continental European small and mid cap stocks from 23 November 2006; and on Brazilian stocks from 18 June 2007. Performance parameters and horizon: Given the volatility of share prices and our pre-disposition not to change recommendations frequently, these performance parameters should be interpreted flexibly. Performance in this context only reflects capital appreciation and the horizon is 12 months. Sector relative to market: The sector view relative to the market is the responsibility of the strategy team. Overweight/Underweight implies upside/downside of 10% or more and Neutral implies less than 10% upside/downside. Target price: The target price is the level the stock should currently trade at if the market were to accept the analyst's view of the stock and if the necessary catalysts were in place to effect this change in perception within the performance horizon. In this way, therefore, the target price abstracts from the need to take a view on the market or sector. If it is felt that the catalysts are not fully in place to effect a re-rating of the stock to its warranted value, the target price will differ from 'fair' value. Asset allocation: The asset allocation is the responsibility of the economics team. The recommended weight (Over, Neutral and Under) for equities, cash and bonds is based on a number of metrics and does not relate to a particular size change in one variable. Stock borrowing rating: The stock borrowing rating is the subjective view and responsibility of the ABN AMRO equity finance team: Easy implies ready availability. Moderate implies some availability. Hard implies availability is tight. Impossible implies no availability.

Distribution of recommendations The tables below show the distribution of ABN AMRO's recommendations (both long term and trading). The first column displays the distribution of recommendations globally and the second column shows the distribution for the region. Numbers in brackets show the percentage for each category where ABN AMRO has an investment banking relationship.

Trading recommendations (as at 27 Nov 2007)

Long Term recommendations (as at 27 Nov 2007) Global total (IB%)

Global total (IB%)

Asia Pacific total

Asia Pacific total (IB%)

(IB%) Buy

596 (15)

392 (4)

Add

1 (0)

1 (0)

427 (19)

258 (4)

Hold Reduce

0 (0)

0 (0)

76 (5)

52 (0)

1100 (16)

703 (3)

Sell Total (IB%)

Trading Buy

6 (0)

6 (0)

Trading Sell

0 (0)

0 (0)

Total (IB%)

6 (0)

6 (0)

Valuation and risks to target price Tata Chemicals (RIC: TTCH.BO, Rec: Buy, CP: Rs307.00, TP: Rs450.00): We value TCL's core business using three-stage DCF and add the value of its investment portfolio at a 30% discount. The key risks to our target price would be: 1) any adverse changes in soda ash prices due to a weakening of the commodity cycle; 2) any adverse changes in India's fertiliser policy that would affect the returns of private-sector producers and distributors; and 3) further delays in fertiliser subsidy payments, which would impact working capital and, thus, increase interest costs.

Regulatory disclosures Subject companies: TTCH.BO

TATA

CH EMI CAL S

27

NOVE MBE R

20 07

28

30

DISCLOSURES APPENDIX

Global disclaimer  Copyright 2007 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO"). All rights reserved.

This material was prepared by the ABN AMRO affiliate named on the cover or inside cover page. It is provided for informational purposes only and does not constitute an offer to sell or a solicitation to buy any security or other financial instrument. While based on information believed to be reliable, no guarantee is given that it is accurate or complete. While we endeavour to update on a reasonable basis the information and opinions contained herein, there may be regulatory, compliance or other reasons that prevent us from doing so. The opinions, forecasts, assumptions, estimates, derived valuations and target price(s) contained in this material are as of the date indicated and are subject to change at any time without prior notice. The investments referred to may not be suitable for the specific investment objectives, financial situation or individual needs of recipients and should not be relied upon in substitution for the exercise of independent judgement. The stated price of any securities mentioned herein is as of the date indicated and is not a representation that any transaction can be effected at this price. Neither ABN AMRO nor other persons shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material. This material is for the use of intended recipients only and the contents may not be reproduced, redistributed, or copied in whole or in part for any purpose without ABN AMRO's prior express consent. In any jurisdiction in which distribution to private/retail customers would require registration or licensing of the distributor which the distributor does not currently have, this document is intended solely for distribution to professional and institutional investors. Australia: Any report referring to equity securities is distributed in Australia by ABN AMRO Equities Australia Ltd (ABN 84 002 768 701, AFS Licence 240530), a participant of the ASX Group. Any report referring to fixed income securities is distributed in Australia by ABN AMRO Bank NV (Australia Branch) (ABN 84 079 478 612, AFS Licence 238266). Australian investors should note that this document was prepared for wholesale investors only. Brazil: ABN AMRO Corretora de Cambio e Valores Mobiliarios S.A. is responsible for the part of this report elaborated by research analysts registered at Comissao de Valores Mobiliarios - CVM, as indicated. Investors resident in Brazil who receives this report should rely only on research prepared by research analysts registered at CVM. In addition to other representations contained in this report, such research analysts state that the views expressed and attributed to them accurately reflect solely and exclusively their personal opinions about the subject securities and issuers and/or other subject matter as appropriate, having such opinion(s) been produced freely and independently from any party, including from ABN AMRO or any of its affiliates. Canada: The securities mentioned in this material are available only in accordance with applicable securities laws and may not be eligible for sale in all jurisdictions. Persons in Canada requiring further information should contact ABN AMRO Incorporated. EEA: This material constitutes "investment research" for the purposes of the Markets in Financial Instruments Directive and as such contains an objective or independent explanation of the matters contained in the material. Any recommendations contained in this document must not be relied upon as investment advice based on the recipient's personal circumstances. In the event that further clarification is required on the words or phrases used in this material, the recipient is strongly recommended to seek independent legal or financial advice. Denmark: ABN AMRO Bank N.V. is authorised and regulated in the Netherlands by De Nederlandsche Bank. In addition, ABN AMRO Bank N.V., Copenhagen Branch is subject to local supervision by Finanstilsynet, the Danish Financial Supervisory Authority. All analysts located in Denmark follow the recommendations from the Danish Securities Dealers Association. Finland: ABN AMRO Bank N.V. is authorised and regulated in the Netherlands by De Nederlandsche Bank. In addition, ABN AMRO Bank N.V., Helsinki Branch is subject to local supervision by Rahoitustarkastus, the Finnish Financial Supervision Authority. Hong Kong: This document is being distributed in Hong Kong by, and is attributable to, ABN AMRO Asia Limited which is regulated by the Securities and Futures Commission of Hong Kong. India: Shares traded on stock exchanges within the Republic of India may only be purchased by different categories of resident Indian investors, Foreign Institutional Investors registered with The Securities and Exchange Board of India ("SEBI") or individuals of Indian national origin resident outside India called Non Resident Indians ("NRIs") and Overseas Corporate Bodies ("OCBs"), predominantly owned by such persons or Persons of Indian Origin (PIO). Any recipient of this document wanting additional information or to effect any transaction in Indian securities or financial instrument mentioned herein must do so by contacting a representative of ABN AMRO Asia Equities (India) Limited. Italy: Persons in Italy requiring further information should contact ABN AMRO Bank N.V. Milan Branch. Japan: This report is being distributed in Japan by ABN AMRO Securities Japan Ltd to institutional investors only. Malaysia: ABN AMRO research, except for economics and FX research, is not for distribution or transmission into Malaysia. New Zealand: This document is distributed in New Zealand to institutional investors by ABN AMRO Securities NZ Limited, an NZX accredited firm, and to retail investors by ABN AMRO Craigs Limited, an NZX accredited firm. ABN AMRO Craigs Limited and/or its partners and employees may, from time to time, have a financial interest in respect of some or all of the matters discussed. Russia: The Russian securities market is associated with several substantial risks, legal, economic and political, and high volatility. There is a relatively high measure of legal uncertainty concerning rights, duties and legal remedies in the Russian Federation. Russian laws and regulations governing investments in securities markets may not be sufficiently developed or may be subject to inconsistent or arbitrary interpretation or application. Russian securities are often not issued in physical form and registration of ownership may not be subject to a centralised system. Registration of ownership of certain types of securities may not be subject to standardised procedures and may even be effected on an ad hoc basis. The value of investments in Russian securities may be affected by fluctuations in available currency rates and exchange control regulations. Singapore: Any report referring to equity securities is distributed in Singapore by ABN AMRO Asia Securities (Singapore) Pte Limited (RCB Regn No. 198703346M) to clients who fall within the description of persons in Regulation 49 of the Securities and Futures (Licensing and Conduct of Business) Regulations and Regulations 34 and 35 of the Financial Advisers Regulations. Any report referring to non-equity securities is distributed in Singapore by ABN AMRO Bank NV (Singapore Branch) Limited to clients who fall within the description of persons in Regulations 34 and 35 of the Financial Advisers Regulations. Investors should note that this material was prepared for accredited investors only. Recipients who do not fall within the description of persons under Regulation 49 of the Securities and Futures (Licensing and Conduct of Business) Regulations or Regulations 34 and 35 of the Financial Advisers Regulations should seek the advice of their independent financial advisor prior to taking any investment decision based on this document or for any necessary explanation of its contents. Sweden: ABN AMRO Bank N.V. is authorised and regulated in the Netherlands by De Nederlandsche Bank. In addition, ABN AMRO Bank N.V., Stockholm Branch is subject to local supervision by the Swedish Financial Supervisory Authority. Thailand: Pursuant to an agreement with Asia Plus Securities Public Company Limited (APS), reports on Thai securities published out of Thailand are prepared by APS but distributed outside Thailand by ABN AMRO Bank NV and affiliated companies. Responsibility for the views and accuracy expressed in such documents belongs to APS. United Kingdom: All research is distributed by ABN AMRO Bank NV, London Branch, which is authorised by De Nederlandsche Bank and regulated by the Financial Services Authority for the conduct of UK business. The investments and services contained herein are not available to private customers in the United Kingdom. United States: Except for any documents relating to foreign exchange, FX or global FX, distribution of this document in the United States or to US persons is intended to be solely to major institutional investors as defined in Rule 15a-6(a)(2) under the US Securities Act of 1934. All US persons that receive this document by their acceptance thereof represent and agree that they are a major institutional investor and understand the risks involved in executing transactions in securities. Any US recipient of this document wanting additional information or to effect any transaction in any security or financial instrument mentioned herein, must do so by contacting a registered representative of ABN AMRO Incorporated, Park Avenue Plaza, 55 East 52nd Street, New York, N.Y. 10055, US, tel + 1 212 409 1000, fax +1 212 409 5222. - Material means all research information contained in any form including but not limited to hard copy, electronic form, presentations, e-mail, SMS or WAP. _________________________________________________________________________________________________________________________________ The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts. _________________________________________________________________________________________________________________________________ For a discussion of the valuation methodologies used to derive our price targets and the risks that could impede their achievement, please refer to our latest published research on those stocks at www.abnamroresearch.com. Disclosures regarding companies covered by ABN AMRO group can be found on ABN AMRO's research website at www.abnamroresearch.com. ABN AMRO's policy on managing research conflicts of interest can be found at https://www.abnamroresearch.com/Disclosure/Disclosure.AspX?MI=5. Should you require additional information please contact the relevant ABN AMRO research team or the author(s) of this report.

TATA

CH EMI CAL S

27

NOVE MBE R

20 07

29

31

TATA CHEMICALS: KEY FINANCIAL DATA Income statement Rsm Revenue

FY06A

FY07A

FY08F

FY09F

FY10F

40344.2

58096.0

59941.5

65350.7

71930.5 -29491

Cost of sales

-18265

-23606

-23753

-26794

Operating costs

-14561

-24424

-25312

-25894

-28306

EBITDA

7518.2

10066.5

10876.5

12662.5

14133.3

DDA & Impairment (ex gw)

-1840.4

-2738.8

-3052.8

-3053.4

-3097.4

EBITA

5677.8

7327.7

7823.7

9609.1

11035.9

Goodwill (amort/impaired) EBIT Net interest

n/a

n/a

n/a

n/a

n/a

5677.8

7327.7

7823.7

9609.1

11035.9

-504.8

-823.9

-997.8

-885.2

-730.9

Associates (pre-tax)

n/a

n/a

n/a

n/a

n/a

Forex gain / (loss)

n/a

n/a

n/a

n/a

n/a

Exceptionals (pre-tax)

n/a

n/a

n/a

n/a

n/a

Other pre-tax items

807.9

942.7

1114.8

1200.0

1201.0

Reported PTP

5980.9

7446.5

7940.7

9923.9

11506.0

Taxation

-1723.1

-2400.9

-2528.3

-2778.7

-3221.4

n/a

n/a

n/a

n/a

n/a

25.6

34.8

1262.4

0.00

0.00

Minority interests Exceptionals (post-tax) Other post-tax items

0.00

0.00

0.00

0.00

0.00

Reported net profit

4283.4

5080.4

6674.8

7145.2

8284.6

Normalised Items Excl. GW Normalised net profit

25.6

34.8

1262.4

0.00

0.00

4257.8

5045.6

5412.4

7145.2

8284.6

Source: Company data, ABN AMRO forecasts

year to Mar

Balance sheet Rsm

FY06A

FY07A

FY08F

FY09F

FY10F

Cash & market secs (1)

1164.7

1544.6

3119.7

5324.0

7414.9

Other current assets

17365.5

18598.4

20646.4

23171.8

26229.8

Tangible fixed assets

27794.1

30560.5

30986.6

31433.2

32335.8

Intang assets (incl gw)

7074.9

7632.4

7632.4

7632.4

7632.4

Oth non-curr assets

6411.0

8328.2

8348.6

8348.6

8348.6

59810.2

66664.1

70733.6

75910.0

81961.6

Total assets Short term debt (2)

7202.8

3772.3

3772.3

3772.3

3772.3

Trade & oth current liab

15941.8

19217.4

18777.2

19666.4

20747.8

Long term debt (3)

11074.1

14869.7

8869.7

8869.7

8869.7

3468.2

3123.5

3123.5

3123.5

3123.5

37686.9

40982.9

34542.7

35431.9

36513.3

22123.3

25681.2

36191.0

40478.2

45448.3

59810.2

66664.1

70733.7

75910.0

81961.6

17112.2

17097.4

9522.3

7318.0

Oth non-current liab Total liabilities Total equity (incl min) Total liab & sh equity Net debt (2+3-1) Source: Company data, ABN AMRO forecasts

5227.1 year ended Mar

Cash flow statement Rsm

FY06A

FY07A

FY08F

FY09F

FY10F

EBITDA

7518.2

10066.5

10876.5

12662.5

14133.3 -1976.7

Change in working capital

-5231.4

1602.7

-1225.2

-1636.2

Net interest (pd) / rec

-504.8

-823.9

-997.8

-885.2

-730.9

Taxes paid

-874.0

-2142.0

-2528.3

-2778.7

-3221.4

Other oper cash items

739.0

452.0

0.00

0.00

0.00

1647.0

9155.3

6125.2

7362.4

8204.3

Capex (2)

-1954.8

-5319.8

-3500.0

-3500.0

-4000.0

Disposals/(acquisitions)

-9780.3

116.1

0.00

0.00

0.00

4670.0

-1330.0

0.00

0.00

0.00

-7065.1

-6533.7

-3500.0

-3500.0

-4000.0

0.00

0.00

6000.0

0.00

0.00

1020.0

471.0

-6000.0

0.00

0.00

-1589.3

-1715.7

-2165.0

-2858.1

-3313.4

Cash flow from ops (1)

Other investing cash flow Cash flow from invest (3) Incr / (decr) in equity Incr / (decr) in debt Ordinary dividend paid Preferred dividends (4) Other financing cash flow Cash flow from fin (5) Forex & disc ops (6) Inc/(decr) cash (1+3+5+6) Equity FCF (1+2+4)

n/a

n/a

n/a

n/a

n/a

-572.7

-1122.0

0.00

0.00

0.00

-1142.0

-2366.7

-2165.0

-2858.1

-3313.4

3.00

63.8

0.00

0.00

0.00

-6557.1

318.7

460.3

1004.3

890.9

-307.8

3835.5

2625.2

3862.4

Lines in bold can be derived from the immediately preceding lines. Source: Company data, ABN AMRO forecasts

TATA

CH EMI CAL S

4204.3 year to Mar

27

NOVE MBE R

20 07

30

32

TATA CHEMICALS: PERFORMANCE AND VALUATION Standard ratios Performance

Tata Chemicals

Grasim Industries

FY06A FY07A FY08F FY09F FY10F

India aggregate

2007

2008

Sales growth (%)

34.1

44.0

3.18

9.02

10.1

FY08F FY09F FY10F 10.3

21.5

5.20

12.1

4.19

12.3

EBITDA growth (%)

46.4

33.9

8.05

16.4

11.6

25.0

24.6

-6.72

23.9

17.2

14.1

EBIT growth (%)

51.1

29.1

6.77

22.8

14.8

26.1

23.7

-8.63

25.1

17.5

13.9

Normalised EPS growth (%)

37.5

18.5

7.27

32.3

15.9

23.9

20.8

-5.44

n/a

n/a

n/a

EBITDA margin (%)

18.6

17.3

18.1

19.4

19.6

33.0

33.9

30.0

19.3

21.7

28.5

EBIT margin (%)

14.1

12.6

13.1

14.7

15.3

28.6

29.1

25.2

14.4

16.3

22.1

Net profit margin (%)

10.6

8.68

9.03

10.9

11.5

16.5

16.4

14.7

11.4

12.3

16.4

Return on avg assets (%)

8.78

8.83

8.82

10.5

11.1

17.2

18.4

16.1

4.63

4.37

5.08

Return on avg equity (%)

20.2

21.1

17.5

18.6

19.3

23.2

22.1

17.1

23.1

20.9

21.7

ROIC (%)

18.6

12.9

13.4

15.3

16.7

22.0

21.2

19.3

21.6

19.5

23.9

ROIC - WACC (%)

6.46

0.73

1.26

3.14

4.56

0.00

0.00

0.00

n/a

n/a

n/a

year to Mar

year to Mar

2009

year to Mar

Valuation EV/sales (x)

2.11

1.47

1.30

1.15

1.02

2.67

2.03

1.79

2.18

2.11

2.32

EV/EBITDA (x)

11.3

8.47

7.14

5.96

5.19

8.10

6.01

5.98

13.8

11.8

9.43

EV/EBITDA @ tgt price (x)

15.6

11.6

10.1

8.47

7.44

7.17

5.26

5.18

0.63

0.55

0.37

EV/EBIT (x)

15.0

11.6

9.93

7.85

6.65

9.36

7.00

7.10

17.6

15.1

11.8

EV/invested capital (x)

2.31

2.25

1.90

1.76

1.60

2.39

2.20

2.02

3.61

3.08

2.75

Price/book value (x)

3.38

2.91

2.07

1.84

1.64

2.95

2.35

1.97

n/a

n/a

n/a

Equity FCF yield (%)

-0.41

5.13

3.51

5.18

5.64

-2.44

8.91

8.82

1.72

2.53

4.14

Normalised PE (x)

17.6

14.8

13.8

10.4

9.00

14.3

11.8

12.5

n/a

n/a

n/a

Norm PE @tgt price (x)

25.7

21.7

20.2

15.3

13.2

12.4

10.3

10.9

n/a

n/a

n/a

Dividend yield (%)

2.60

3.05

3.28

3.83

4.44

0.80

0.94

0.94

1.30

1.43

1.74

year to Mar

Per share data Tot adj dil sh, ave (m)

FY06A FY07A FY08F FY09F FY10F

Solvency

year to Mar

FY06A FY07A FY08F FY09F FY10F 77.3

66.6

26.3

18.1

Reported EPS (INR)

17.6

20.9

27.4

29.4

34.1

Net debt to tot ass (%)

28.6

25.6

13.5

9.64

6.38

Normalised EPS (INR)

17.5

20.7

22.2

29.4

34.1

Net debt to EBITDA

2.28

1.70

0.88

0.58

0.37

7.98

9.36

10.1

11.8

13.6

Current ratio (x)

0.80

0.88

1.05

1.22

1.37

-1.26

15.8

10.8

15.9

17.3

Operating CF int cov (x)

5.99

14.7

9.67

12.5

16.6

Dividend cover (x)

2.48

2.51

2.50

2.50

2.50

Dividend per share (INR) Equity FCF per share (INR) Book value per sh (INR)

243.5 243.5 243.5 243.0 243.0

year to Mar

90.9 105.5 148.6 166.6 187.0

Net debt to equity (%)

year to Mar

11.5

year to Mar

Priced as follows: TTCH.BO - Rs307.00; GRAS.BO - Rs3734.20 Source: Company data, ABN AMRO forecasts

TATA CHEMICALS: VALUATION METHODOLOGY % 48 6 32 15 100 37 0 14

Discounted Cash Flow Valuation Rsm Value of Phase 1: Explicit (2008 to 2010) 9032 Value of Phase 2: Value Driver (2011 to 2020) 36218 Value of Phase 3: Fade (2021 to 2037) 28958 Terminal Value 16032 Enterprise Value 90241 FCF Grth Rate at end of Phs 1 implied by DCF Valuation FCF Grth Rate at end of Phs 1 implied by Current Price

111304

123

Returns, WACC and NPV of Free Cash Flow

5%

Phase 2 Avg (2011 - 2020) 7.0 16.0 1.8

2036

2034

2032

0% 2030

2010 6.6 15.3 1.6

10%

2028

2009 5.0 14.7 1.6

12 520 476 438 406 377

2026

2008 4.1 13.1 1.5

10 507 466 431 400 373

2024

8 494 457 424 395 369

2022

6 481 446 416 389 365

Performance Summary Invested Capital Growth (%) Operating Margin (%) Capital Turnover (x)

15%

2020

WACC

4 467 436 408 383 360

% 10 40 32 18 100 5.0 1.9

4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0

20%

No of Years in Fade Period

Sensitivity Table 8.0% 9.0% 10.0% 11.0% 12.0%

25%

2018

458 307

2016

Per Share Equity Value Current Share Price

2014

243

2012

No. Shares (millions)

2010

Equity Value

Rsm 43186 5105 28530 13421 90241 33709 0 12646

2008

Economic Profit Valuation Adjusted Opening Invested Capital NPV of Economic Profit During Explicit Period NPV of Econ Profit of Remaining Business (1, 2) NPV of Econ Profit of Net Inv (Grth Business) (1, 3) Enterprise Value Plus: Other Assets Less: Minorities Less: Net Debt / Leases (as at 26 Nov 2007)

Phase 1 NPV of FCF (RHS)

Phase 2 NPV of FCF (RHS)

Phase 3 NPV of FCF (RHS)

Total Business ROIC

Growth Business ROIC

Remaining Business ROIC

WACC

1. In periods following the Explicit Period i.e. Phase 2 and Phase 3 2. Remaining Business is defined as Capital as at the end of Phase 1 and capex = depreciation thereafter 3. Net Investment is defined as capex over and above depreciation after Phase 1 Source: ABN AMRO forecasts

TATA

CH EMI CAL S

27

NOVE MBE R

20 07

31

33

Strategic & competitive overview

Tata Chemicals Company description

Buy

Price relative to country

Tata Chemicals is part of the Tata group of companies, one of India's leading business groups. It was incorporated in 1939 and has since grown to become India's leading manufacturer of inorganic chemicals with a domestic market share of over 30% in soda ash in India. It is also a leading manufacturer and distributor of fertilisers in India, and its branded salt product called 'Tata Namak' has a market share of over 50% in India's branded salt market. TCL operates the largest and most integrated inorganic chemicals complex in India, at Mithapur in Gujarat, an integrated urea plant in Babrala in Uttar Pradesh and a phosphatic fertiliser complex at Haldia in West Bengal. It is in the process of establishing a chain of one-stop shop for farmers called Tata Kisan Vikas Kendras, which use modern technology to distribute agri-inputs and farming expertise to the Indian farming community.

Strategic analysis

Average SWOT company score:

4

Strengths

120 110 100 90 80 70 60 Nov Mar 04 05

Jul 05

Oct Feb Jun Sep Jan Apr Aug Nov 05 06 06 06 07 07 07 07

Product mix FY07

5

TCL has developed global production scale in soda ash, which is a commoditised product. It has presence across all key fertiliser segments - urea as well as phosphatics and NPK. The company is also strengthening its rural distribution infrastructure by setting up Tata Kisan Vikas Kendras.

Weaknesses

SSP 1.5%

Opportunities

4

Fertiliser sector reforms could improve returns for producers like TCL with depreciated asset bases. Increased political focus on investing in India's agricultural sector to improve food security and lift the rural economy would be positive.

Threats

3

Increase in fertiliser subsidies and inadequate government budgeting for these could lead to a crunch in working capital for fertiliser companies, including TCL. Scoring range is 1-5 (high score is good)

Soda Ash 21.1%

H2So4 0.7%

STTP 4.7%

Caustic Soda 0.4% Soda Bicarb 1.9% Bromine 0.5% Salt 9.2%

DAP 12.7%

3

Soda ash, being a commodity product, is subject to industry cycles. Any over-capacity in China or the US could lead to short-term dumping of products into India. The fertiliser segment is highly regulated in India and, therefore, subject to policy risks.

NPK 17.8%

Urea 24.1%

Cement 5.4%

Source: Company data , ABN AMRO

Market data Headquarters Bombay House, 24 Homi Mody Street, Fort, Mumbai 400 001, India Website www.tatachemicals.com Shares in issue 222.0m Freefloat 70% Majority shareholders Institutions (37%), Public (32%), Tata group (32%)

India Country view

Neutral

Country rel to Asia Pacific

The ABN AMRO Indian PMI suggests the economy is still powering ahead despite the global headwinds, thanks to its domestically-oriented economic structure. Moreover inflationary pressure has eased with the recent rate hikes by the RBI. At the sector level, we still like autos (commercial vehicles), software and construction-related stocks as infrastructure spending should be a growth driver in FY08.

230 210 190 170 150

The country view is set in consultation with the relevant company analyst but is the ultimate responsibility of the Strategy Team.

130 110 90 Nov Mar Jun Oct Feb Jun Sep Dec Apr Aug Nov 04 05 05 05 06 06 06 06 07 07 07

Competitive position

Average competitive score:

Supplier power

3-

Broker recommendations

3+

6

Input costs in fertilisers are passed through under the current controlled pricing regime. For soda ash, TCL is looking to develop captive plants to reduce dependence on power suppliers.

Barriers to entry

5 4

4+

3

In both fertilisers and soda ash segments, manufacturing scale and capital costs to set up a facility are the key barriers to entry.

2

Customer power

0

1

4-

Buy

Soda ash is a commodity product and therefore manufacturers have little pricing power. Fertiliser, being a controlled sector, leaves manufacturers with little ability to influence pricing at present.

Substitute products

Hold

Sell

Source: Bloomberg

2-

There are no real substitutes for soda ash or fertilisers.

Rivalry

4-

For soda ash, TCL has over 30% market share in India. Globally, the sector is still fragmented, but we see some cross-border consolidation. The fertiliser industry in India is government-controlled. Scoring range 1-5 (high score is good)

Plus = getting better

TATA

Minus = getting worse

CH EMI CAL S

27

NOVE MBE R

20 07

32

34

Angel Broking

TM

Textile Sector

Service Truly Personalized

India Research

Tata Chemicals

Buy Target Price: Rs387 (12 Months)

CMP: Rs303 Rohit Nagraj Tel: 022 - 4040 3800 Ext: 340 E-mail:[email protected]

Stock Info Sector Market Cap (Rs cr) Beta

Chemicals 6,519 0.54

52 Week High / Low

340/187

Avg Daily Volume

133356

Face Value (Rs) BSE Sensex Nifty

10 18,603 5,561

BSE Code

500770

NSE Code

TATACHEM

Reuters Code Bloomberg Code

TTCH.BO TTCH IN

Shareholding Pattern (%) Promoters

31.6

MF / Banks / Indian FIs

30.8

‘Aspiring to touch New Horizons’ Tata Chemicals (TCL) is a leading player in inorganic chemicals and the largest player in soda ash in India. With the Brunner Mond acquisition, TCL has now become the third largest soda ash player in the world with over 3.0mt capacity. Rising demand and strong soda ash prices thereof coupled with backward integration into phosphoric acid (through 33% stake in IMACID) augurs well for TCL. We believe, going ahead, a favourable business environment and capacity additions will sustain the company’s Earnings momentum. At the CMP of Rs303, the stock is available at 10.9x consolidated FY2008E EPS of Rs27.8 and 9.0x consolidated FY2009E EPS of Rs33.6. We Initiate Coverage on the stock, with a Buy recommendation and Target Price of Rs387. „ Strong Soda Ash demand to keep prices firm: Global soda ash demand has been growing 3-4% pa, in the last few years and is expected to continue to grow at same levels over the next 3-4 years as well. Domestic demand for soda ash is expected to grow at 4.5-5% pa following demand from detergents (3-3.5%) and rising construction activity fueling glass demand. We believe that strong demand, high utilisation rates and slower pace in capacity additions would keep the soda ash prices firm over the next 2-3 years. „ Capacity expansions to meet rising demand for Soda Ash: TCL currently has over 3.0mt of consolidated soda ash capacity. To meet the rising demand for soda ash TCL has planned capex Rs300-350cr to augment its domestic and international soda ash capacity by over 6,00,000 tonnes over the next couple of years. TCL's new soda ash capacities are expected to come on stream when there would be a capacity crunch globally and soda ash prices are ruling strong. „ Branded Salt and Cement to be Earnings' accretive: We expect TCL's Salt sales to grow at a CAGR of 9-10% over the next couple of years. On the back of strong cement demand, TCL is expanding capacity of its Mithapur plant by over 20% from 0.5mt to 0.6mt, which will add to Earnings. Key Financials (Consolidated)

FII / NRIs / OCBs Indian Public / Others

6.0 31.6

Y/E March (Rs cr) Net Sales

FY2006

FY2007

FY2008E

FY2009E

4,034

5,810

6,374

7,071

% chg Net Profit

-

44.0

9.7

10.9

428.3

508.0

599.0

723.0

% chg

-

18.6

17.9

20.7

EPS (Rs)

19.9

23.6

27.8

33.6

EBITDA Margin (%)

18.8

17.4

17.5

18.5

P/E (x)

15.2

12.8

10.9

9.0

P/CEPS (x)

10.6

8.3

7.3

6.4

RoE (%)

19.4

19.8

20.3

21.3

RoCE (%)

11.9

13.3

14.4

16.9

P/BV (x)

2.9

2.5

2.2

1.9

EV/ Sales (x)

2.0

1.4

1.3

1.1

10.9

8.1

7.3

5.9

EV/ EBITDA (x)

Source: Company, Angel Research

November 21, 2007

For Private Circulation Only - Sebi Registration No : INB 010996539

1

35

Angel Broking

TM

Tata Chemicals

Service Truly Personalized

TCL enjoys leadership position in the domestic soda ash segment with a sizeable marketshare of around 32%

India Research

Company Background TCL is a leading player in the inorganic chemicals segment in India. TCL’s business is classified into two segments viz., inorganic chemicals (including food additives) and fertilisers, which contributed 54% and 46% to FY2007 consolidated Top-line, respectively. On a standalone basis, the segments contributed 37% and 63% to Top-line respectively, in FY2007. Inorganic chemicals comprise soda ash, salt, cement, etc., while fertilisers comprise phosphatic fertilisers like di-ammonium phosphate (DAP), mono-ammonium phosphate (MOP), NPK, etc. TCL’s products find application in various industries ranging from agriculture to pharmaceutical. Exhibit 1: Revenue Break-up - FY2007

Source: Company, Angel Research

Inorganic Chemicals: The company‘s inorganic chemicals facility is located at Mithapur, Gujarat. TCL’s urea plant is located at Babrala, Uttar Pradesh while phosphatic fertilisers are manufactured at Haldia, West Bengal. TCL enjoys leadership position in the domestic soda ash segment with a sizeable marketshare of around 32%. Soda ash is primarily used by the detergents and glass industries. TCL is a clear leader in the branded edible Salts category

Salt: In the branded edible salts category, which is highly fragmented and unorganised, TCL is a clear leader with a marketshare of over 47%. TCL is a dominant player in the western and northern regions, and has plans to tap the eastern and southern markets. In line with this, it has launched the low-priced I-Shakti salt in the south, which has met with encouraging response.

TCL has been operating its cement plant at more than 115% capacity utilisation

Cement: To reduce effluents and waste, TCL had set up a cement unit in 1993. On the back of enhanced construction activity in the country, strong demand for cement and firm cement prices thereof, this venture has since become a profitable one for the company. Pertinently, TCL has been operating its cement plant at more than 115% capacity utilisation. TCL sells the cement in the neighbouring areas of Saurashtra and Kutch under the Shudh brand.

TCL has increased investments in the fertiliser segment following government’s emphasis on increasing farm product output

Fertilisers: TCL derives majority of its revenues (stand-alone) from the Fertiliser segment where it is focused primarily on phosphatic fertilisers and urea. Although, the urea prices are government regulated, due to higher efficiency (energy usage ratio of 5.2Gcal/ MT being lowest in the country) and higher capacity utilisation (over 137% during FY2007) the company has been able to register good Margins in this segment. TCL’s phosphatic fertilisers witnessed good demand following the government’s emphasis on increasing farm product output on account of which it has increased investments in the sector. Sement-wise performance All the business segments of TCL fared well during FY2007 on the back of strong demand from the domestic and international markets. TCL’s domestic Soda Ash sales increased 6.7% yoy to Rs679cr (Rs636cr) while Exports to the Middle East, South Asia and SE Asia amounted to Rs75cr in FY2007. Strong international

November 21, 2007

2

For Private Circulation Only - Sebi Registration No : INB 010996539

36

Angel Broking

TM

Tata Chemicals

Service Truly Personalized

India Research soda ash prices helped the company clock good Margins in the product during FY2007. Sodium bicarbonate, which is used as poultry feed and as a ‘raising agent’ in bakery products, witnessed a significant jump of 15.5% yoy to Rs66.8cr (Rs57.8cr). Strong demand and prices in cement helped TCL post 35.5% yoy jump in cement revenues from Rs142.5cr in FY2006 to Rs193.2cr in FY2007.

Efficiency and high productivity have helped TCL register good Margins in fertilisers even though the fertiliser prices are government regulated

Tata Salt continues to be a market leader in the branded salts category and witnessed 6.5% yoy growth to Rs330.3cr (Rs310.3cr) in FY2007. The government’s emphasis on increasing farm product output has been the growth driver for fertilisers. Efficiency and high productivity have helped TCL register good Margins in fertilisers even though the fertiliser prices are government regulated. In line with this, revenues from Urea jumped 19.6% yoy to Rs863.5cr (Rs722.1cr) in FY2007 while revenues from other fertilisers including NPK, DAP, MOP, etc., moved up by 8% yoy to Rs1,649.8cr (Rs1,527.9cr) in FY2007. Exhibit 2: Revenue profile - Across Product categories (Standalone)

Source: Company, Angel Research

TCL’s inorganic initiatives have been a key driver of growth over the past few years

TCL has also been focusing on developing newer applications and expanding its reach globally, primarily in the European markets. Sodium tripolyphosphate (STPP) came into TCL’s portfolio consequent to the merger of Hind Lever Chemicals with itself. Post the merger, STPP witnessed significant demand (mainly from the detergents segment) and clocked a 126.7% yoy surge in revenues to Rs168.7cr (Rs74.4cr) in FY2007. Strengthening overseas position TCL has been growing both organically as well as inorganically. However, TCL’s inorganic initiatives have been a key driver of growth over the past few years. In line with this, TCL made two major acquisitions viz., bought 33% stake in IMACID – a phosphoric acid manufacturer based in Morocco, and acquired Brunner Mond, a major soda ash player based in Europe. TCL acquired 33% stake from the joint venture (JV) partners of IMACID for a consideration of Rs166cr (US $38mn) in March 2005. IMACID was a JV between OCP (a stateowned company in the Kingdom of Morocco) and Chambal Fertilisers & Chemicals (engaged in the manufacture of phosphoric acid). This acquisition has insulated TCL from any supply disruptions and firming up of phosphoric acid prices. Earlier, TCL used to import phosphoric acid for its fertiliser unit, and in the recent past phosphoric acid prices have been on an uptrend due to the demand-supply imbalance. Hence, the acquisition augurs well for TCL. However, TCL also augmented its own phosphoric acid capacity by 33% in FY2007 to meet the rising demand requirements, which would get reflected in its FY2008E and FY2009E performance. It may be noted here that although TCL procures phosphoric acid at a higher price from IMACID, ultimately it reflects positively in the consolidated Earnings of the company.

November 21, 2007

3

For Private Circulation Only - Sebi Registration No : INB 010996539

37

Angel Broking

TM

Tata Chemicals

Service Truly Personalized

The Brunner Mond, Europe acquisition is expected to help TCL gain a strong foothold in the global soda ash market

India Research Exhibit 3: Phosphoric Acid Price trend

Source: Cris Infac, Angel Research

Post backward integration into the manufacture of phosphoric acids, TCL acquired Brunner Mond, Europe, a much bigger soda ash player with over 2.0mt soda ash capacity. TCL paid about Rs800cr for acquiring the company. With this acquisition, TCL has now become the third largest soda ash player in the world with a cumulative capacity of about 3.0mt. This acquisition is expected to help TCL gain a strong foothold in the global soda ash market. Exhibit 4: Global Soda ash players and their capacities

Source: Solvay, Angel Research

To take the advantage of favourable demand-supply situation, TCL is scaling up capacity of its low-cost Magadi facility by over 2x to 7,15,000tpa

November 21, 2007

Brunner Mond has operations located in three countries including the UK, the Netherlands and Kenya. The company produces over 1.6mtpa of soda ash at these facilities, which includes 9,00,000tpa at Cheshire, UK, 3,30,000tpa at its Netherlands unit and 3,50,000tpa at the Magadi unit, Kenya. The company’s facilities in the UK and the Netherlands produce soda ash using the Solvay process (synthetically) whereas the Magadi facility produces from Trona (a naturally occurring mineral). Since soda ash at Magadi is recovered from the natural mineral of Trona, the manufacturing cost of the plant is the lowest in the world. To take the advantage of favourable demand-supply situation, TCL is scaling up capacity of its Magadi facility by over 2x to 7,15,000tpa.

4

For Private Circulation Only - Sebi Registration No : INB 010996539

38

Angel Broking

TM

Tata Chemicals

Service Truly Personalized

Global soda ash demand is growing at 3-4% pa., and is expected to maintain such growth over the next 3-4 years as well

India Research

Investment Argument Strong Soda Ash demand to keep prices firm Currently, the global soda ash capacity is estimated at 48mt, with China being a dominant (16mt) player followed by the US (14mt). On the other hand, global soda ash demand is growing at 3-4% pa, and is expected to maintain such growth over the next 3-4 years as well. Majority of the soda ash demand is emanating from the Asian and Latin American economies. Even though demand is surging, new capacity addition is lagging the demand growth on account of which the prices of soda ash have firmed up globally. Utilisation rates have also shot up by over 90% globally, which has resulted in the soda ash prices soaring. Some expansion plans and projects in China have been delayed and hence the newer capacities are likely to come up only post 2010. This augurs well for the soda ash prices till then. Currently, the international soda ash prices are hovering at US $250-300/ tonne. Exhibit 5: Domestic Soda Ash price movement

The domestic soda ash prices, which are currently hovering at Rs11,000/tonne levels have strengthened on the back of the strong international prices Source: Cris Infac, Angel Research

The domestic soda ash demand is expected to rise at a healthy 4.5-5% pa owing to the demand from detergents (3-3.5% growth) and rising construction activity fueling demand from the glass industry. Although 42% of the total demand for soda ash comes from the detergents segment and 23% comes from the glass industry, demand from the glass segment is expected to grow in double digits. Over the past few years, capacity utilisation has been in excess of 80%, which is expected to reduce once new capacities come up. The domestic soda ash prices, which are currently hovering at Rs11,000/tonne levels have strengthened on the back of the strong international prices. We believe that strong demand, high utilisation rates and slower pace in capacity additions globally will keep the soda ash prices firm over the next 2-3 years as well. Strong demand, high utilisation rates and slower pace in capacity additions are expected to keep the soda ash prices firm over the next 2-3 years

Exhibit 6: Domestic Demand and Capacity Utilisation Domestic Demand-Soda Ash

FY02

FY03

FY04

FY05

FY06

FY07E

Consumption

1,906

2,004

2,135

2,162

2,289

2,366

5.1

6.5

1.3

5.9

3.4

2,406

2,626

2,626

2,749

2,749

2,959

79.2

76.3

81.3

78.6

83.3

80.0

% chg Capacity Capacity Utilisation (%)

Source: Cris Infac, Angel Research, Note: All quantities are in ,000 tonnes

November 21, 2007

5

For Private Circulation Only - Sebi Registration No : INB 010996539

39

Angel Broking

TM

Tata Chemicals

Service Truly Personalized

Rising soda ash demand has prompted TCL to augment its domestic and international soda ash capacity by over 6,00,000tpa over the next couple of years

TCL is doubling capacity of its low-cost Magadi plant to 7,15,000tpa (earlier 3,50,000tpa)

India Research Capacity expansions on the back of rising demand TCL has close to 3.0mt of consolidated soda ash capacity. Brunner Mond UK and the Netherlands primarily serve the European markets whereas Magadi, the Kenyan plant serves the South African, SE Asian and Indian markets. Rising soda ash demand has prompted TCL to augment its domestic as well as international soda ash capacity by over 6,00,000tpa over the next couple of years. The Magadi plant produces soda ash from Trona, a natural mineral having significant deposits in Lake Magadi and has a regeneration rate of 1.0mtpa. Magadi being the lowest cost producer of soda ash, TCL is doubling capacity of the plant to 7,15,000tpa (earlier 3,50,000tpa). The expanded capacity was expected to come on stream during Q1FY2008 but because of certain operational problems in the furnace, the new capacity has been delayed and is now expected to come on stream by the end of FY2008. Although, the additional capacity has got delayed, TCL has made alternative arrangements with a smaller furnace and is currently operating 30% of the expanded capacity. Exhibit 7: Capacity expansion plans and outlay Capacity expansion (,000tonnes)

Current

Expanded

Investment (Rs cr)

Soda Ash - Mithapur

920

1,200

300

Cement

500

600

Salt

475

600

Urea

865

1,200

150

Soda Ash - Magadi

350

715

16-20

Phosphatic Fertilizers - Haldia

50

Source: Company, Angel Research

TCL’s new soda ash capacities are expected to come on stream at a time when there exists a capacity crunch globally and the soda ash prices are ruling firm

Total capex for capacity expansion is estimated at Rs500-550cr, which would be funded though a combination of foreign currency debt and internal accruals. Recently, TCL raised US $100mn foreign currency debt through its subsidiary, which will be utilised for its expansion plans, both domestic and overseas. TCL’s new soda ash capacities are expected to come on stream at a time when there exists a capacity crunch globally and the soda ash prices are ruling firm. This is expected to maintain the company’s Earnings momentum going ahead. Branded Salt and Cement to be Earnings’ accretive

TCL is operating its Salt works at over 90% capacity utilisation

November 21, 2007

In the branded Salts category, TCL is a clear leader with over 50% marketshare. In organised Retail segment (malls), TCL has garnered over 58% marketshare. Currently, TCL is operating its salt works at over 90% capacity utilisation. Hence, TCL is expanding capacity by over 26% over the next couple of years. TCL’s newly launched I-Shakti brand is doing extremely well in the southern market. In October 2007, TCL launched its low sodium Tata Salt Lite brand in Delhi, Mumbai and Pune. At a higher price point of Rs18/kg, Tata Salt Lite is targeted at the urban, metro and semi metro and health conscious population. TCL’s Salt sales, over the last three years, have grown at a CAGR of 14.6%, and are expected to grow at a CAGR of 9-10% over the next couple of years. We expect the company to grow its Salt sales in FY2009E on the back of expanded capacity and new launches (I-Shakti and Tata Salt Lite).

6

For Private Circulation Only - Sebi Registration No : INB 010996539

40

Angel Broking

TM

Tata Chemicals

Service Truly Personalized

We expect the company to grow its Salt sales in FY2009E on the back of expanded capacity and new launches

India Research Exhibit 8: Salt and Cement volumes and Capacity Utilisation

Source: Company, Angel Research

We believe that even if the cement prices cool off post commissioning of the new capacities, incremental volumes will keep Earnings of this segment intact

TCL forayed into the manufacture of Cement primarily as a waste disposal strategy. But, this venture has grown profitable and is now contributing over 5% to the company’s standalone Top-line. The infrastructure and construction boom in India has propelled growth in cement consumption. Besides, the new cement capacities are struggling to keep pace with the rising demand, which has resulted in firming up of cement prices by around 100% over the past one and a half years. Newer capacities are likely to come up over the next 12-18 months, till such time we expect the cement prices to remain firm. As for TCL, on the back of strong demand it is expanding capacity of its Mithapur plant by over 20% from 0.5mt to 0.6mt. We believe that even if the cement prices cool off post commissioning of the new capacities, incremental volumes will keep Earnings of this segment intact.

TCL has established strong relationships with the farmers and a large number of touch points with the farmers

New initiatives

TCL’s JV in its Fresh Produce business is at a nascent stage but it offers a sizeable opportunity going ahead with the Retail sector witnessing boom times in India

Fresh Produce Business: In January 2007, TCL formed a 50:50 JV with Total Produce Plc., Ireland. Total Produce is Europe’s largest fresh produce company and brings in over 100 years of experience in distribution and management of supply chain for perishable items. Rising income levels and health awareness is propelling growth of fresh foods in India. Currently, because of lack of proper supply chain, cold chain, etc., the farmers are facing losses from perishable agri-produce. This JV will address this issue and set up state-of-the-art distribution chains for fresh fruits and vegetables across India. TCL has already developed touch points with farmers through its TKS initiative, which will be utilised for procurement and primary processing of the fresh produce. The JV is still at a nascent stage but it offers a sizeable opportunity going ahead with the Retail sector witnessing boom times in India. TCL has set aside Rs50cr for investments in this JV and has short listed a site at Ludhiana. TCL is on the look out for another site too in the Eastern part of the country, which is expected to be decided shortly.

Tata Kisan Sansar: Tata Kisan Sansar (TKS) outlets serve the farmer’s needs by supplying agricultural inputs including fertilisers and currently operate in the Northern and Eastern markets with over 600 outlets. Through this initiative, TCL has established strong relationships with the farmers and a large number of touch points with the farmers. This initiative has helped TCL understand the requirements of the farmers, which can give rise to future business and going ahead, help it in procurement and contract farming.

Bio-fuels and Innovation center at Pune: Rising energy demand coupled with rising crude oil prices have prompted companies all over world to look at alternatives. TCL is also actively pursuing opportunities in the bio-ethanol and bio-diesel space. It has earmarked Rs50cr for this venture and has already placed an order with Praj Industries for a 30KL/ day bio-ethanol plant, which will be operational in FY2009. In the recent past, bio-fuel has been a buzzing space and it is expected to do well in the future given the rise in domestic demand for energy. November 21, 2007

7

For Private Circulation Only - Sebi Registration No : INB 010996539

41

Angel Broking

TM

Tata Chemicals

Service Truly Personalized

India Research As a part of its growth strategy and adoption of newer technologies, TCL is now focusing on Biotechnology and Nanotechnology also. To promote studies in these areas, it has set up a team of over 20 scientists which would be increased to over 50 over the next three years. TCL has also opened an Innovation Center at Pune where the research work will be conducted and has earmarked over Rs50cr investment for this initiative spread over five years. We expect this initiative to help TCL diversify into newer technologies and applications going ahead. Concerns Rising ocean freight rates, naphtha costs Rising crude oil prices have impacted freight rates across segments including road, ocean and air. Although, air freight rates do not impact TCL, the rise in ocean freight rates has a significant impact on its overseas business. The exports from Brunner Mond are primarily carried out by the ocean route. Hence, a rise in ocean freight rates would hit TCL’s transportation costs. However, increase in the product prices has actually nullified the effect of rising freight rates. But, if crude inches up further, it will definitely impact the company’s consolidated Margins. Domestically however, heat from higher crude oil prices has not yet been sensed as there has been no increase in the retail fuel prices. But, given the current scenario, we believe a fuel price hike is inevitable. Exhibit 9: Coke and Naphtha Price movement

Source: Cris Infac, Angel Research

Apart from freight rates, the coke and naphtha prices have also inched up in the past one year. However, as of now TCL is insulated from any price rise in coke, as it is covered for coke supplies till the end of FY2008. Hence, the prices will be revised only in April 2008 for FY2009. Rise in crude oil prices has a direct co-relation with the naphtha prices and there has been a stupendous rise in naphtha prices over the past couple of years. We believe that both the coke and naphtha prices are likely to remain strong going ahead but, the rise will be offset by the rising product prices. Natural gas prices have been more or less constant, but there is a possibility of revising the gas prices upwards given the bickering by the E&P companies. Delay in subsidy payment impacts working capital Since the fertiliser sector in India is regulated and the prices of fertilisers are fixed by the government, the shortfall between the market price and actual selling price to the end user is compensated by subsidy. Although, the government makes an allocation for the subsidy in the Union Budget, the actual outlay usually gets delayed and hence the cash flows for the companies get impacted. The delay in receipt of subsidy puts pressure on the working capital thus impacting profitability as the interest burden goes up (on borrowed working capital). This is hitting TCL’s standalone performance but the impact on consolidated performance is relatively less.

November 21, 2007

8

For Private Circulation Only - Sebi Registration No : INB 010996539

42

Angel Broking

TM

Tata Chemicals

Service Truly Personalized

India Research

Robust soda ash prices helped TCL report a 8.7% yoy growth in consolidated Revenues to Rs1,733cr (Rs1,594cr) in Q2FY2008

Financial Performance

OPM was impacted by increasing fuel costs, trade and port congestion which increased the ocean freight rates, and rise in coke and coal prices

Chemicals Division: Domestic production, which stood lower at 1,50,000 tonnes (1,80,000 tonnes) was impacted by the floods in Mithapur, Gujarat and power shortage, which affected the company’s plant operations severely. Brunner Mond, Europe registered a strong performance during Q2FY2008 on the back of firm soda ash prices, although the sales volumes remained stable at 3,00,000 tonnes (2,99,000 tonnes).

Q2FY2008 numbers Due to the robust demand and tight supply position in the global market, the soda ash prices continue to rule firm globally. This has helped TCL report a 8.7% yoy growth in consolidated Revenues to Rs1,733cr (Rs1,594cr) and 11.5% yoy jump in standalone Revenues to Rs1,255cr (Rs1,126cr) in Q2FY2008. The benefits derived from strong product prices and Rupee appreciation (in case of imports) were negated by an increase in the key raw material price during the quarter denting Operating Margins. Increasing fuel costs, trade and port congestion increased the ocean freight rates, and rise in coke and coal prices impacted the company’s Operating Margins. Consolidated Operating Margins declined by 40bp yoy to 16.9% (17.3%) whereas standalone Operating Margins fell by 80bp yoy to 16.7% (17.5%). Standalone Consolidated results witnessed a sharp jump in foreign exchange gains due to Rupee appreciation at Rs45.1cr (Rs1.9cr), which aided the surge in Profitability. On the one hand, while standalone PAT declined 9.6% yoy to Rs143cr (Rs158cr), on the other, consolidated PAT increased 12.2% yoy to Rs208cr (Rs185cr).

Fertiliser Division: The company’s Fertiliser sales remained robust during Q2FY2008 with an overall 8% yoy growth in consumption. Urea sales went up 7.3% yoy to 3,36,000 tonnes (3,13,000 tonnes). Phosphatic fertiliser (NPK, DAP) sales grew 12% to 2,89,000 tonnes (2,58,000 tonnes). Food Additives and Cement Divisions: TCL continues to be a dominant player in the domestic edible Salt market with a 50% marketshare in the branded category. Cement demand was lower during the quarter primarily due to the heavy rains. But, the prices continue to rule strong.

TCL’s consolidated 1HFY2008 Bottom-line surged 26.1% to Rs345.6cr (Rs274.1cr) on the back of forex gains

1HFY2008 numbers For 1HFY2008 TCL clocked a marginal 2.1% increase in consolidated Top-line to Rs2,863cr (Rs2,805cr) . However, TCL’s consolidated 1HFY2008 Bottom-line surged 26.1% to Rs345.6cr (Rs274.1cr). Consolidated Operating Margins for 1HFY2008 expanded by 100bp yoy to 18.8% (17.8%). Bottom-line moved up on forex gains following an appreciating Rupee to the tune of Rs86.3cr (loss of Rs11.6cr). Inorganic Chemicals Division: The company wintessed substantial yoy decline in consolidated EBIT Margins by 310bp to 13.7% (16.8%) in its Inorganic Chemicals Division primarily on the back of higher freight, power and raw material (coke) costs. Fertiliser Division: Consolidated EBIT Margins of the Fertiliser Division jumped by 440bp to 16.1% (11.7%) on the back of higher offtake. It may be noted that TCL’s FY2007 performance is not comparable with FY2006 because of the acquisition of 33% stake in IMACID in FY2005 and acquisition of Brunner Mond in FY2006.

November 21, 2007

9

For Private Circulation Only - Sebi Registration No : INB 010996539

43

Angel Broking

TM

Tata Chemicals

Service Truly Personalized

India Research Exhibit 10: Q2FY2008 Performance (Standalone) Y/E March (Rs cr)

Q2FY2008 Q2FY2007 %chg

Net Sales COGS Total Operating Expenditure EBITDA EBITDA Margin (%) Other Income Foreign exchange (Gain)/ Loss Depreciation Interest PBT PBT Margin (%) Total Tax % of PBT FBT PAT Exceptional items Adj. PAT PAT Margin (%)

1,255 728 1,046 209.2 16.7 44.3 8.8 36.7 1.1 206.9 16.5 63.3 30.6 1.0 142.6 0.0 142.6 11.0

1,126 11.5 611 19.2 929 12.6 197.2 6.1 17.5 68.2 (35.0) 4.6 93.0 36.5 0.7 3.2 (65.3) 221.2 (6.5) 19.6 62.1 2.0 28.1 1.5 (33.3) 157.7 (9.6) 0.0 157.7 (9.6) 13.2

1HFY2008 1HFY2007 1,924 955 1,552 372.4 19.4 56.4 (29.0) 73.4 1.4 383.0 19.9 117.3 30.6 2.0 263.7 0.0 263.7 13.3

%chg

1,881 2.3 904 5.6 1,525 1.8 355.8 4.7 18.9 73.6 (23.4) 20.8 (239.6) 73.0 0.6 3.9 (64.5) 331.7 15.5 17.6 96.2 21.9 29.0 2.5 (20.0) 233.0 13.2 0.0 233.0 13.2 11.9

Source: Company, Angel Research

Exhibit 11: Segment-wise Break-up (Standalone) Y/E March (Rs cr)

Q2FY2008 Q2FY2007 %chg

1HFY2008 1HFY2007

%chg

Inorganic Chemicals

3,296

3,617

(8.9)

6,828

7,346

(7.1)

Fertilisers

9,255

7,643

21.1

12,412

11,460

8.3

12,551

11,260

11.5

19,241

18,807

2.3

1,506

1,828

(17.6)

22.1

24.9

63.6

1,909

1,359

15.4

11.9

12.2

3,415

3,187

17.8

16.9

Total Segment EBIT Inorganic Chemicals

593

915 (35.2)

% EBIT

18.0

25.3

1,380

844

Fertilisers % EBIT Total % EBIT

14.9

11.0

1,973

1,758

15.7

15.6

40.4 7.2

Less: Interest Other unallocated expenditure Total Total PBT % PBT

11

32 (65.3)

(365)

(107)

(486) (77.9)

(50)

(331)

(85.0)

(96)

(454) (78.8)

(415)

(129)

220.4

2,069

2,212

3,830

3,317

15.5

16.5

19.6

19.9

17.6

(6.5)

202 (281.0)

Source: Company, Angel Research

November 21, 2007

For Private Circulation Only - Sebi Registration No : INB 010996539

10

44

Angel Broking

TM

Tata Chemicals

Service Truly Personalized

India Research Exhibit 12: Q2FY2008 Performance (Consolidated) Y/E March (Rs cr)

Q2FY2008 Q2FY2007 %chg

Net Sales

1HFY2008 1HFY2007

%chg

1,733

1,594

8.7

2,863

2,805

2.1

825

707

16.7

1,123

1,100

2.1

Total operating expenditure

1,440

1,319

9.2

2,324

2,307

0.8

EBITDA

293.3

275.5

6.5

538.6

498.5

8.0

EBITDA Margin ( %)

16.9

17.3

18.8

17.8

Other Income

44.4

68.5 (35.1)

56.5

74.1

(86.3)

11.6

COGS

Foreign exchange (Gain)/ Loss

(23.8)

(45.1)

(1.9)

Depreciation

78.6

65.4

20.2

155.3

129.0

20.4

Interest

27.2

26.8

1.5

52.8

49.5

6.6

276.9

253.7

9.2

473.3

382.5

23.7

PBT Margin (%)

16.0

15.9

16.5

13.6

Total Tax

67.7

66.6

125.7

105.9

% of PBT

24.5

26.3

26.6

27.7

2.0

2.5

(20.0)

345.6

274.1

26.1

0.0

0.0

345.6

274.1

11.8

9.5

PBT

FBT

1.0

PAT

208.2

185.5

0.0

0.0

208.2

185.5

11.7

11.2

Exceptional items Adj. PAT PAT Margin (%)

1.6

1.5 (33.3) 12.2 12.2

18.7

26.1

Source: Company, Angel Research

Exhibit 13:Segment-wise Break-up (Consolidated) Y/E March (Rs cr)

Q2FY2008 Q2FY2007 %chg

Inorganic Chemicals

718

790

(9.1)

1HFY2008 1HFY2007 1,497

%chg

1,564

(4.3)

Fertilisers

1,015

804

26.3

1,365

1,241

10.0

Total Segment EBIT Inorganic Chemicals

1,733

1,594

8.7

2,863

2,805

2.1 (22.0)

% EBIT

67

148 (54.7)

205

263

9.3

18.7

13.7

16.8

219

146

16.1

11.7

Fertilisers

173

% EBIT

17.1

86 102.3 10.7

Total

240

233

% EBIT

13.9

14.6

27

27

Other unallocated expenditure

(64)

Total

(37)

Total PBT % PBT

2.9

50.5

425

409

14.8

14.6

3.9

1.5

53

50

6.6

(47)

36.0

(101)

(23)

340.6

(20)

81.8

(48)

277

254

9.2

473

383

16.0

15.9

16.5

13.6

Less: Interest

27 (282.1) 23.7

Source: Company, Angel Research

November 21, 2007

For Private Circulation Only - Sebi Registration No : INB 010996539

11

45

Angel Broking

TM

Tata Chemicals

Service Truly Personalized

India Research Outlook and Valuation TCL has earmarked over Rs500cr for various expansions, which is expected to drive volumes going ahead. Ongoing expansions will be completed over the next couple of years in a phased manner and effects of the same will be fully reflected in the company’s FY2010E performance. We believe that the global prices of chemicals will remain strong and hence are positive for the company’s future growth prospects. The company has investments of over Rs36/ share (value as on March 2007 and inclusive of both quoted and unquoted investments). At the CMP of Rs303, the stock is available at 10.9x consolidated FY2008E EPS of Rs27.8 and 9.0x consolidated FY2009E EPS of Rs33.6. We Initiate Coverage on the stock, with a Buy recommendation and Target Price of Rs387.

November 21, 2007

For Private Circulation Only - Sebi Registration No : INB 010996539

12

46

Angel Broking

TM

Tata Chemicals

Service Truly Personalized

India Research

Profit & Loss Statement (Consolidated) Y/E March

FY2006

Net Sales

4,034

% chg

Rs crore

FY2007 FY2008E

FY2009E

5,810

6,374

7,071

44.0

9.7

10.9

Balance Sheet (Consolidated) Y/E March

FY2006

Rs crore FY2007 FY2008E

FY2009E

SOURCES OF FUNDS Equity Share Capital

215.2

215.2

215.2

215.2

COGS

1,365

1,911

2,126

2,333

Reserves & Surplus

2,004.2

2,356.7

2,729.1

3,175.2

Total operating expenditure

3,278

4,799

5,256

5,765

Misc. exp.

7.0

3.7

0.0

0.0

757

1,011

1119

1,306

Shareholder's Funds

2,212.3

2,568.1

2,944.3

3,390.4

1,827.7

1,864.2

1,800.0

1,400.0

346.8

312.4

312.4

312.4

4,386.8

4,744.7

5,056.6

5,102.7

EBITDA EBITDA Margin (%)

18.8

17.4

17.5

18.5

Total Loans

Other Income

83.4

97.8

102.5

97.5

Deferred Tax Liab.

184.0

273.9

290.9

300.4

50.5

82.4

83.6

86.9

Depreciation & Amortisation Interest

Total Liabilities APPLICATION OF FUNDS

Exceptional Items

4.7

3.9

3.7

0.0

Gross Block

4,846.2

5,782.3

6,256.9

6,586.9

PBT

601

748

843

1016

Less: Accu. Depreciation

2,625.7

2,955.8

3,246.7

3,547.1

PBT Margin (%)

14.6

12.7

13.0

14.2

Net Block

2,220.5

2,826.4

3,010.2

3,039.8

Total Tax

166.8

235.0

239.0

287.2

Capital Work-in-Progress

558.9

229.6

105.0

55.0

% of PBT

27.8

31.4

28.3

28.3

Goodwill on consolidation

707.5

763.2

763.2

763.2

547.5

775.3

775.3

775.3

93.6

57.6

57.6

57.6

FBT

5.5

5.1

5.0

5.5

Investments

PAT

428

508

599

723

Deferred Tax Asset

Extraordinary Items

0.0

0.0

0.0

0.0

Current Assets

1,853.0

2,014.3

2,237.6

2,487.5

Adj. PAT

428

1,594.2

1,921.7

1,892.3

2,075.6

258.8

92.6

345.4

411.9

4,386.8

4,744.7

5,056.6

5,102.7

% chg PAT Margin (%)

10.4

508

599

723

Current Liabilities

18.6

17.9

20.7

Net Current Assets

8.6

9.2

10.1

Total Assets

Cash Flow Statement (Consolidated) Y/E March

FY2006

Rs crore

FY2007 FY2008E

FY2009E

Key Ratios Y/E March

600.7

748.1

843.0

1015.7

Depreciation

184.0

273.9

290.9

300.4

Change in Working Capital

(512.1)

182.8

(279.5)

(64.6)

Direct Taxes paid

(193.3)

(234.8)

(244.0)

(292.7)

79.3

970.0

610.4

958.8

Inc./ (Dec.) in Fixed Assets 1,179.7

606.7

350.0

280.0

Free Cash Flow

(1,100.4)

363.3

260.4

678.8

(410.4)

227.8

0.0

0.0

Debt / Equity (x)

0.0

0.0

0.0

0.0

Return Ratios (%)

102.0

36.5

(64.2)

(400.0)

(158.9)

(171.7)

(201.3)

(226.6)

111.7

37.7

0.0

(7.3)

Cash Flow from Financing 465.2

(325.3)

(265.5)

(633.9)

Inc./ (Dec.) in Investments Issue of Equity Inc./(Dec.) in Loans Dividend paid (incl. tax) Other non-cash Exp/(Inc)

Inc./(Dec.) in Cash

FY2009E

EPS

19.9

23.6

27.8

33.6

Cash EPS

28.5

36.3

41.4

47.6

DPS BookValue

7.0

8.0

9.0

11.0

102.8

119.4

136.8

157.6

Operating Ratios (%) Raw Material / Net Sales (%)

33.8

32.9

33.4

33.0

184.2

119.7

115.0

114.0

66.1

58.3

65.0

66.0

0.8

0.7

0.6

0.4

RONW

19.4

19.8

20.3

21.3

ROCE

11.9

13.3

14.4

16.9

Dividend Payout

35.2

33.9

32.3

32.7

P/E (x)

15.2

12.8

10.9

9.0

P/CashEPS (x)

10.6

8.3

7.3

6.4

P/BV (x)

2.9

2.5

2.2

1.9

2.0

1.4

1.3

1.1

10.9

8.1

7.3

5.9

Inventory (days) Debtors (days)

Valuation Ratios (x)

(635.2)

38.0

(5.1)

44.9

Opening Cash balances

751.7

116.5

154.5

149.3

EV/Total Sales (x)

Closing Cash balances

116.5

154.5

149.3

194.3

EV/EBITDA (x)

November 21, 2007

FY2007 FY2008E

Per Share Data (Rs)

Profit before Tax

Cash Flow from Operations

FY2006

For Private Circulation Only - Sebi Registration No : INB 010996539

13

47

Angel Broking

TM

Tata Chemicals

Service Truly Personalized

India Research

Fund Management & Investment Advisory

(  022 - 4040 3800 / 2835 9600)

Ajay Jaiswal

Investment Strategist (Kolkata)

[email protected]

P. Phani Sekhar

Fund Manager

[email protected]

Prakarsh Gagdani

AVP - Investment Advisory

[email protected]

Research Team

(  022 - 4040 3800 / 2835 9600)

Sarabjit Kour Nangra Hitesh Agrawal Vaishali Jajoo Harit Shah Rohit Nagraj Pawan Burde Girish Solanki Shailesh Kanani Surbhi Chawla Anand Shah Sulabh Agrawal Alpesh Mehta Puneet Bambha Amit Bagaria Akshat Vyas Reena Walia Neha Idnany

VP-Research, Pharmaceutical VP-Research, Cement, Media Automobile IT, Telecom Oil & Gas Metals & Mining Retail, Hotel, Mid-Cap Capital Goods Aviation, Shipping, Logistics FMCG Mid-cap Banking Power PMS Research Associate (Pharmaceutical) Research Associate (Retail, Hotel) Research Associate - (PMS)

[email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected]

Sandeep Wagle Ajit Joshi Milan Sanghvi Nitin Kunte Brijesh Ail Vaishnavi Jagtap

Chief Technical Analyst AVP Technical Advisory Services Sr. Technical Advisor Technical Advisor Technical Analyst Technical Analyst

[email protected] [email protected] [email protected] [email protected] [email protected] [email protected]

Siddarth Bhamre

Fund Manager - Derivatives & Equities

[email protected]

Anisha Gupta Kalpesh Gohel

Analyst - (PMS) Associate (PMS)

[email protected] [email protected]

Research Head (Commodities) Sr. Technical Analyst Sr. Technical Analyst Sr. Technical Analyst

[email protected] [email protected] [email protected] [email protected]

Badruddin Harmit Virvadia

Sr. Research Analyst (Agri) Sr. Research Analyst (Bullion)

[email protected] [email protected]

Bharathi Shetty Bharat Patil

Research Editor Production

[email protected] [email protected]

Commodities Research Team Amar Singh Samson P Anuj Gupta Girish Patki Commodities Research Team (Fundamentals)

Disclaimer This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions. Opinion expressed is our current opinion as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true and are for general guidance only. While every effort is made to ensure the accuracy and completeness of information contained, the company takes no guarantee and assumes no liability for any errors or omissions of the information. No one can use the information as the basis for any claim, demand or cause of action. Recipients of this material should rely on their own investigations and take their own professional advice. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Certain transactions - futures, options and other derivatives as well as non-investment grade securities - involve substantial risks and are not suitable for all investors. Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals. We do not undertake to advise you as to any change of our views expressed in this document. While we would endeavor to update the information herein on a reasonable basis, Angel Broking, its subsidiaries and associated companies, their directors and employees are under no obligation to update or keep the information current. Also there may be regulatory, compliance, or other reasons that may prevent Angel Broking and affiliates from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Angel Broking Limited and affiliates, including the analyst who has issued this report, may, on the date of this report, and from time to time, have long or short positions in, and buy or sell the securities of the companies mentioned herein or engage in any other transaction involving such securities and earn brokerage or compensation or act as advisor or have other potential conflict of interest with respect to company/ies mentioned herein or inconsistent with any recommendation and related information and opinions. Angel Broking Limited and affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past.

Ratings (Returns) November 21, 2007

Buy > 15%,

Hold 5-15%,

Sell < - 10%

For Private Circulation Only - Sebi Registration No : INB 010996539

14

48

Angel Broking

TM

Tata Chemicals

Service Truly Personalized

India Research

Corporate & Marketing Office

:

612, Acme Plaza, M.V. Road, Opp Sangam Cinema, Andheri (E), Mumbai - 400 059

Wealth Management

:

e-mail : [email protected]

Tel : (022) 4000 3600 / 2835 9600 Tel : (022) 4000 3945 / 3900

Investment Advisory Helpdesk

:

e-mail : [email protected]

Tel : (022) 4040 3800

Commodities

:

e-mail : [email protected]

Tel : (022) 4000 3900 / 01

Feedback

:

e-mail : [email protected]

Tel : (022) 2835 5000

Regional Offices: Ahmedabad - Harshit Bhavsar Tel: (079) 3007 0749 - 751

Indore - Pramathu Chowksey Tel: (0731) 3013 360 - 65

Nashik - Nilesh Supekar Nashik - 422 002. Tel: (0253) 6614 235/236

Rajkot - Vijay Popat Tel :(0281) 6451929 / 1910

Bangalore - Dhiraj Pandey Tel: (080) 4153 6700 - 03

Jaipur - Ranveer Singh Jaipur - 302 001 Tel: (0141) 222 3334

New Delhi - Anshit Khanna Tel: (011) 4605 6600 / 4151 2555 / 2666

Surat - Pinky Kothari Tel: (0261) 6696 666

Chennai - Thiruneer Selvan Tel: (044) 4226 9000 Fax: 2498 1742

Kolkata - Vijay Kothari Tel: (033) 4009 9899

Pune - Sunita Magnani Tel: (020) 2551 3143 / 2553 0912 - 14

Visakhapatnam - Vamshi Krishna Tel :(0891) 6620 572-75

Hyderabad - Shiva Shankar Tel: (040) 6673 3573 / 74

Private Client Group Offices: Mumbai - Prakarsh Gagdani Tel: (022) 4040 3800 Fax: (022) 4040 3899

Sub - Broker Marketing: Ahmedabad (C. G. Road) - Arpit Shah Tel: (079) 3007 4049 / 50

Surat - Ali Asgar Rasiwala Mobile : (0261) 6696 666

Acme Plaza - Pankaj Mungre Tel: (022) 4000 3900 Fax: (022) 4000 3999

Andheri (Lokhandwala) - Muskaan Doultani Tel : (022) 2639 2626 / 3255 0987

Ahmedabad (C. G. Road) - Ritesh Patel Tel: (079) 4021 4023

Jamnagar - Jwalant Shingala Tel : (0288) 266 4941-44, 3217 790

Rajkot (Star Chambers) - Manish Baradia Tel : (0281) 2233 230 / 50

Andheri (W) - Dinesh Nihalani Tel: (022) 2635 2345 / 6668 0021

Ahmedabad (Gurukul) - Kaivalya Shah Tel: (079) 6522 5510 / 3012 5492-94

Jodhpur - Amit Kumbhat Tel: (0291) 5100 941 - 948 / 3208 354

Rajkot (Star Chambers) - Nilesh Vora Tel : (0281) 2225 401 / 02 / 03

Bandra (W) - Anit Hake Tel: (022) 2655 5560 / 70

Ahmedabad (Kalupur) - Jicky Thomas Tel: (079) 3240 7474 / 75

Junagadh - Vishal Kanabar Tel : (0285) 2622 483 /2622 484

Secunderabad - Srinivas Tel : (040) 6690 5192 / 3 / 4

Bandra (W) - Faruq Wakani Tel: (022) 6643 2694 - 99

Ahmedabad (Maninagar) - Ashok Kumar Tel: (079) 3048 0241 / 0242 / 0245

Kota - Sumit Maheshwari Tel : (0285) 2622 483 /2622 484

Surat (Mahidharpura) - Sameet Kapadia Tel: 2402 911 - 915

Borivali (W) - Gyan P. Joshi Tel:(022) 2895 2600 / 1 / 2

Ahmedabad (Ramdevnagar) - Krunal Pandya Tel : (079) 2692 6401 / 51

Mehsana - Alipt Doshi Tel: (02762) 645 291 / 92

Surat (Parle Point) - Akshay Panwala Tel : (0261) 2257 990 / 909

Borivali (W) - Tarun Dhami Tel: (022) 3092 1969 / 2892 8890

Ahmedabad (Sabarmati) - Kaushik Rathi Tel : (079) 2692 6401 / 51

Nadiad - Vipul Patel Tel : (0268) - 2527 230 / 31

Surat (Ring Road) - Piyush Bothra Tel : (0261) 6696 666

Chembur - Rajesh Mehta Tel:(022) 6703 0210 / 11 /12

Ahmedabad (Satellite) - Rishi Parghi Tel: (079) 4000 1000

Nashik - Nilesh Supekar Tel: (0253) 6611 201 / 206

Surendranagar - Prashant Jani Tel : (02752) 325905 / 223305

Fort - Pankaj V. Shah Tel: (022) 2263 4050-55

Ahmedabad (Shahibaug) - Chirag Raghvani Tel: (079) 22861053 / 5 / 6

New Delhi (Bhikaji Cama Place) - Sumit Bhuttan Tel: (011) 41659 711/12

Udaipur - Anurag Jain Tel - 098870 60723 / 099291 04723

Ghatkopar (E) - Ashwin Thakkar Tel: (022) 6799 3185 - 88 / 2510 1525

Amreli - Nishith Hemani Tel: (02792) 228 800/231039-42

New Delhi (Lawrence Rd.) - Surender Kumar Tel: (011) 3262 8699 / 8799

Valsad - Suchita Krishnani Tel - (02632) 645 344 / 45

Goregaon (W) - Sanjiv Dhami Tel: (022) 2878 9401 / 02

Anand - Pragnesh Pandya Tel : (02692) 267 041-45

New Delhi (Pitampura) - Roopal Agarwal Tel: (011) 4700 2380 / 84

Vapi - Jalpa Desai Tel: (0260) 2400 210 / 214 / 236

Kalbadevi - Viren Ved Tel: (022) 2243 5599 / 2242 5599

Ankleshwar - Ankit Mathur Tel: (02646) 652 681-85

New Delhi (Preet Vihar) - Vipul Kaushik Tel: (011) 4242 1105 - 07

Vijayawada - Badrinath Majeti Tel :(0866) 6636900 / 901/ 902 / 903

Kandivali (W) - Sachin Ghelani Tel: (022) 2867 3800 / 2867 7032

Baroda - Manthan/Rashmikant Tel: (0265) 6624 280 / 2226 103

Palanpur - Paresh Patel Tel : (02742) 645 171 / 72

Kandivali (Thakur Village) - Akharam Chaudhary Tel: (022) 2846 1267 / 1654 / 2056 / 2076

Baroda (Akota) - Manisha Tandel Tel: (0265) 2355 258 / 3080 615

Patan - Shikha Saxena Tel: (02766) 222 306

Malad (E) - Satish Kanwarjani Tel: (022) 2880 4440

Bhavnagar - Apurva Dhami Tel: (0278) 2512099 / 755 / 3001717 / 18

Porbandar - Ketan Thanki Tel : (0286) 221 5310 / 31 / 221 5450

Malad (W) - Tushar Shah Tel: (022) 2880 0960 / 68

Bhopal - Sandeep Kothana Tel :(0755) 3256 663 / 4024 000

Pune - Iftikhar Chouhan Tel : (020) 6620 6591 / 6620 6595

Mulund (W) - Niraj Anand Tel: (022) 2562 2282

Gandhinagar - Vivek Thakker Tel: (079) 4010 1010 - 31

Rajkot (202 Race Cource) Hitesh Rupareliya Tel : (0281) 2921 568, 99049 10001

Thane (W) - Diksha Khushalani / Rajesh Kumar Tel: (022) 2539 0786 / 0789 / 0796

Gondal - Lenin Trivedi Tel: (02825) 240 693 / 4

Rajkot (University Rd.) - Prashant Ukani Tel : (0281) 2577408

Vashi - Punit Chopra Tel: (022) 2765 4749 / 2251

Himatnagar - Aasif Hirani Tel: (02772) 241 008

Rajkot (Bhaktinagar) - Dhaval Dave Tel : (0280) 236 1935 / 329 6881 / 329 8100

Vile Parle (W) - Manish Negandhi Tel: (022) 2610 2894 / 95

Indore - Alok Rathi Tel: (0731) 4042242 / 4044 366 / 4087 966

Rajkot (Indira Circle) - Denish Patel Tel : (0281) 2585 751, 99258 84848

Ahmedabad (Bapu Nagar) - Milan Kanabar Tel : (079) 3026 0204 / 0205

Jalgaon - Sandeep Mundra Tel: (0257) 3200 906

Rajkot (Orbit Plaza) - Hitesh Popat Tel: (0281) 2463 291-94

Branch Offices:

Angel Broking Limited Central Support & Registered Office:G-1, Akruti Trade Centre, Road No. 7, MIDC Marol, Andheri (E), Mumbai - 400 093 Tel : 2835 8800 / 3083 7700 Angel Broking Ltd : BSE Sebi Regn No : INB 010996539 / CDSL Regn No: IN - DP - CDSL - 234 - 2004 / PMS Regn Code: PM/INP000001546 Angel Capital & Debt Market Ltd: INB 231279838 / NSE FNO: INF 231279838 / NSE Member code -12798 Angel Commodities Broking (P) Ltd: MCX Member ID: 12685 / FMC Regn No: MCX / TCM / CORP / 0037 NCDEX : Member ID 00220 / FMC Regn No: NCDEX / TCM / CORP / 0302

November 21, 2007

For Private Circulation Only - Sebi Registration No : INB 010996539

15

49