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Table of Contents

Rpt. 13143133 12-Feb-2008

TATA CHEMICALS LTD PIONEER INTERMEDIARIES PVT LTD - AGARWALLA, ASHWANI

2 - 13

Rpt. 12603021 28-Aug-2007

TATA CHEMICALS LTD PIONEER INTERMEDIARIES PVT LTD - AGARWALLA, A.

14 - 32

These reports were compiled using a product of Thomson Financial.

www.thomson.com/financial

1

TATA CHEMICALS LTD. Q3 FY 2008 update RESEARCH

Sector Chemicals & Fertilisers

Rs66bn. Rs106 231mn. 407,448 (BSE+NSE) Rs431 / 187 TTCH.IN TTCH.BO

SHAREHOLDING PATTERN (%) Qtr. Ended Promoters Banks/FIs/MFs FIIs/NRIs/OCBs PCBs Indian public Eq Shares.(mn)

Jun-07 31.6 30.3 6.2 5.0 26.9 215

Sep-07 31.6 30.8 6.0 5.3 26.3 215

Dec-07 29.9 31.0 8.9 5.5 24.7 227

STOCK PERFORMANCE (%) 1M (25.1) (14.1)

Absolute Relative

3M (4.1) 2.6

12M 26.9 1.3

STOCK PRICE PERFORMANCE

TCL

480

BSE (Rebased)

405 330 255 180 Feb-07

May -07

Aug-07

Nov -07

Feb-08

z Political unrest and plant shutdown impacts BMG Sales and production were hampered at the Magadi plant due to political unrest in Kenya. Inspite doubling of capacity at Kenya, production increased by only 15% to 115k mt. Shutdown at UK plant resulted in 6% drop in production to 298k mt. High input cost without corresponding increase in realisations & high capital charges affected profitability. z Acquisition of General Chemicals Industrial Products TCL has acquired 75% stake in General Chemicals Industrial Products(GCIP), a 2.5mn mtpa natural soda ash manufacturer in US for Rs40bn. The move makes TCL the second largest manufacturer of soda ash globally with a capacity of 5.5mn mtpa.

VALUATIONS AND RECOMMENDATION At the CMP of Rs273, TCL is trading at a P/E of 9.3x, EV/Sales of 1.0x and EV/EBIDT of 5.0x its FY09E consolidated estimates. We believe that full capacity utilisation at Magadi, higher realisations, expansions at Babrala should help deliver a better performance. However, continuous delay in efficient utlisation of new plant at Magadi, increasing direct costs and capital charges dilute the valuation of the company. The current CMP of Rs273, fairly values the earning potential of TCL. Hence, we downgrade our recommendation to 'HOLD'.

Net Sales

KEY RATIOS

Quarter Ended* Jun-07 Sep-07

Yr Ended (March)

Dec-07

2005

2006

Yr Ended (March)

2007

2008E

2009E

6,689

12,551

12,240

30,081

40,344

58,096

63,404

72,749

YoY Gr. (%)

(11.4)

11.5

(6.4)

-

34.1

44.0

9.1

14.7

Op. Profits

1,632

2,092

2,046

5,155

7,565

10,105

10,812

13,128

24.4

16.7

16.7

17.1

18.8

17.4

17.1

18.0

Net Profits

1,212

1,426

1,255

3,406

4,283

5,080

5,381

7,122

Eq Capital

2,152

2,310

2,310

2,152

2,152

2,152

2,436

2,436

Op. Marg. (%)

CMP Rs 273

z Fertiliser shines but chemicals spoil the show Changes in fertiliser policy, timely realization of subsidies and lesser trading in fertiliser boosted the performance of the fertiliser segment. Manufactured-urea sales increased by 3% to 296 mt, however lesser trading of fertiliser resulted in overall sales declining by 13% to Rs8.6bn. Shortage of salt impacted production of soda ash which was flat at 190k mt and sales dipped by 3% to 182k mt. However increased realisations in soda ash, pushed sales by 13% to Rs4.2bn. However, high power and fuel cost eroded the increased profitability.

KEY FINANCIALS (CONSOLIDATED) Rs mn

I

KEY HIGHLIGHTS On a consolidated basis Tata Chemicals Ltd (TCL) reported 4% decrease in net sales to Rs17.5bn due to 13% fall in revenue from fertiliser and subdued growth in chemical division. However, OPM expanded by 22 bps to 15.2% on the back of slump in low margin trading business. Surge in capital charges and penalty on prepayment of loan impacted net profits which plummeted by 42% to Rs0.9bn.

STOCK DATA Market Cap Book Value per share Eq Shares O/S (F.V. Rs.10) Median Vol (12 mths) 52 Week High/Low Bloomberg Code Reuters Code

HOLD

* Standalone numbers Analyst - Ashwani Agarwalla I [email protected] I Tel: +91-22-6618 6482

2005

2006

2007

2008E

2009E

Dil. EPS (Rs)

14.0

17.6

20.9

22.1

29.2

ROCE (%)

13.2

18.0

20.0

19.2

22.5

RONW (%)

17.0

20.3

21.2

17.5

18.8

P/E (x)

19.5

15.5

13.1

12.4

9.3

EV/Sales (x)

2.0

1.8

1.2

1.2

1.0

EV/EBDIT (x)

9.9

8.4

6.5

6.3

5.0

12 February 2008

1

2

PERFORMANCE OVERVIEW (STANDALONE) TCL reported a 9% decrease in standalone net sales to Rs12.2bn owing to a 14% fall in fertiliser revenues to Rs8bn while the inorganic chemical division registered a 13% rise in revenues to Rs4.2bn. Urea production increased by 2.5% to 283k mt (capacity utilisation-129%) and due to shortage of sulphur and phosphoric acid, complex fertilisers were flat at 190k mt (capacity utilisation-99%). Shortage of raw salt at Mithapur resulted in lower production of soda ash which was flat at 190k mt (capacity utilisation-80%) and production of edible salt rose by 13% to 132k mt.

Sales & Production Volumes (mt) Q3FY08

Q3FY07 YoY(%)

9MFY08

9MFY07

YoY(%)

296,000 182,000 120,000 237,000

287,000 187,000 114,000 236,000

3.1 (2.7) 5.3 0.4

832,000 487,000 344,000 587,000

805,000 541,000 350,000 603,000

3.4 (10.0) (1.7) (2.7)

283,000 190,000 132,000 190,000

276,000 191,000 117,000 191,000

2.5 (0.5) 12.8 (0.5)

784,000 508,000 353,000 497,000

746,000 549,000 332,000 565,000

5.1 (7.5) 6.3 (12.0)

Sales Urea Soda ash Salt Complex fertiliser Production Urea Soda ash Salt Complex fertiliser

Fertiliser (India)

Favourable policy changes & low trading boosts profitability...

Production volumes directly had an effect on sales volume, as a result urea sales volumes increased by 3.1% to 296k mt while sales of complex fertiliser was flat at 237k mt. However, due to sharp fall in trading of complex fertilisers, revenue from the segment slumped by 14% to Rs8bn. Favourable changes in fertiliser policy of reimbursing ammonia prices on a monthly basis vis a vis on a quarterly basis earlier, improved subsidy realizations. Till Q1FY08, cost of ammonia was reimbursed at the average price prevailing in trailing quarter, which impacted profitability in a rising price scenario. The revised policy reimburses the cost at the average price prevailing in the trailing month. Hence, the loss suffered in a rising price scenario is lesser. From Q1FY08, the urea manufacturers were allowed to retain gains above 110% capacity utilization which resulted in a substantial expansion in realization and profitability. Earlier, the manufacturers had to share 65% of gains with the government if the production exceeded 100% of the capacity. Due to perennial shortage of urea in India, TCL has been operating its plant at ~130% capacity, which resulted in higher profits for the segment. Furthermore, the company has ceased trading in loss making DAP fertilisers. Despite, disruption of gas supply at the HBJ pipeline which forced higher usage of naphtha at the Babrala plant, there was no substantial impact on profitability of the division as the raw material cost is pass through. PBIT margin of the segment improved by 518bps to 11.3%, hence PBIT surged by 59% to Rs904mn. Inorganic Chemicals (India)

Shortage of salt & high coal and fuel prices impact performance...

Inspite of modernisation of Mithapur plant and implementation of cost rationalising and efficiency increasing programme ‘Udaan’ at the plant, there has not been any substantial increase in volume and profitability at the plant. In the quarter, the production volumes of soda ash declined by 1% to 190k mt due to shortage of salt (a key raw material), consequently sales volumes dropped by 3% to 182k mt while sales of edible salt rose by 5% to 120k mt. Prices of soda ash has been inflationary in last 1 year and they have escalated ~40% to USD250-300/mt. Earlier, TCL had entered in long term selling contracts at ~USD190/mt , as a result the realisations did not increase in tandem with the spot prices. The contracts are being renewed in phases, consequently there has been expansion in realisations and we expect the margins to improve from Q1FY09 as most of the contracts will be renewed then. Higher realisations pushed the revenue of chemical division by 13% to Rs4.2bn. 2

3

Prices of coke (currently ~USD500/mt vs. ~USD270/mt in FY07), and coal (~USD100/ mt vs. ~USD60/mt in FY07) firmed in the quarter. Even though the realisation of soda ash increased but extensive use of coke and coal as fuel at Mithapur hampered its profitability. Consequently, PBIT margins fell by 38bps to 24.4% and PBIT edged up only by 11% to Rs1bn. Input cost impact overall margins Strong performance from the fertiliser segment was dampened by the chemical segment. Consequently, OPM expanded by only 321bps to 16.7% and operating profit rose by 16% to Rs2bn. Other income plunged by 61% to Rs125mn as TCL had posted translation gains of Rs208mn in Q3FY07 due to appreciation of the rupee. Even though operating profits were higher and capital charges declined, net profit increased by only 7.6% to Rs1.3bn due to lower other income. Brunner Mond

Political unrest & plant shutdown impacts performance...

BMG, a 100% subsidiary, posted sales of Rs4.3bn. Production from European plants decreased by 5.7% to 298k mt (capacity utilisation -99%) due to a 2 week unplanned shutdown at the plant in UK. As a result, sales in Europe dropped by 3% to 300k mt. Inspite of doubling of capacity at Magadi, the plant witnessed a meager 15.3% increase in production volumes to 115k mt (capacity utilisation - 66%) due to political unrest in Kenya. The new capacity at Magadi was suppose to commence operation in Q3FY07 but due to refractory design issues it was delayed by 3 quarters. Currently it is operating at 60% utilisation and is expected to scale up to full capacity by Q2FY09.

BMG - Sales & Production Volumes (mt) Q3FY08

Q3FY07

YoY(%)

9MFY08

9MFY07

YoY(%)

300,000

310,000

(3.2)

909,000

904,000

0.6

Sales Europe Africa

100,000

97,000

3.1

288,000

282,000

2.1

Total

400,000

407,000

(1.7)

1,197,000

1,186,000

0.9

Production Europe

298,000

316,000

(5.7)

914,000

898,000

1.8

Africa

115,000

100,000

15.0

295,000

290,000

1.7

Total

413,000

416,000

(0.7)

1,209,000

1,188,000

1.8

Sales at BMG are mostly through long term contracts (1-2 years); whereas the manufacturing costs or sourcing of raw materials are not bound by any matching long term contracts. There was a substantial hike in prices of coke (currently ~USD500/mt vs. ~USD270/mt in FY07), coal (~USD100/mt vs. ~USD60/mt in FY07) and other raw materials which could not be recovered from the buyers. As a result, the OPM fell to 8.2% against an yearly average of 15%. Hence, the operating profit was restricted to Rs350mn. TCL had entered in long term selling contracts at ~USD180/mt , as a result the realisations did not mirror the spot prices and profitability was lower. The renewals of contracts have started from Jan '08 and are expected to be complete by April '08. Hence, we expect, soda ash realizations and profitability to enhance from Q4FY08. Overall soda ash production volumes of BMG declined by 1% to 413k mt and sales increased by only 3% to 100k mt. Consequently, overall sales volume of BMG declined by 2% to 400k mt. BMG had borrowed debt at a high cost (LIBOR+4.5%) for setting up the new plant at Magadi. TCL prepaid the debt along with Rs145mn as prepayment penalty and the debt was refinanced at a fixed rate of 6.4% owing to strong financials of TCL. The refinancing at lower cost will entail a saving of Rs60mn p.a. to the company. BMG also accounted for higher depreciation and interest charges incurred due to commissioning of the new plant in FY07 at Magadi. As a result of the above it incurred a net loss (pre-tax) of Rs310mn. 3

4

IMACID The 33% JV, reported net sales of Rs900mn owing to higher realizations and ramp up in volumes. However, high sulphur and rock phosphate prices marred operating margins, which stood at 17%( annual average has been ~25%). Consequently, operating profit was Rs150mn and net profit was Rs100mn. Consolidated Performance Subdued performance from BMG negated the domestic performance. Consequently, consolidated net sales declined by 4% to Rs17.5bn, operating profit fell by 3% to Rs2.6bn (OPM increased by 22 bps to 15.2%). Net profit plummeted by 42% to Rs0.9bn. Acquisition of GCIP

Acquires 75% stake in 2.5mn mtpa natural soda ash plant...

TCL has acquired 75% stake in GCIP of USA from Harbinger Capital Partner for USD1bn. GCIP owns natural soda ash mines of capacity 2.5 mn mtpa in Green River Basin in Wyoming. Post acquisition, the total soda ash capacity of TCL will augment to 5.5mn mtpa which will propel it to the position of second highest soda ash producer in the world. Solvay (soda ash capacity-8.2 mn mtpa) and FMC (soda ash capacity-5.4 mn mtpa) are the two other major players in the industry. The acquisition will help TCL expand its presence to Asia Pacific, North America and Latin America. Post acquisition TCL will be able to develop a strong foothold across the major continents. TCL had acquired 100% stake in BMG of Europe (soda ash capacity-1.6mn mtpa) in FY06 for a consideration of Rs8bn and enterprise value of Rs19.5bn (including off balance sheet item of Rs3.5bn). However, the prices of soda ash has spiked from USD160/mt in FY06 to current levels of USD250-300/mt, consequently the valuation of the soda ash capacities has also been pushed up. Due to lack of clarity on the company it is not possible to comment on the financials and valuation of the GCIP. Projects/Capex

Projects/Capex Event

Capex (Rs bn)

Timeline

Urea debottlenecking at Babrala (325k mtpa)

1.5

Nov FY09

Increase in soda ash, salt, cement capacity at Mithapur

2.5

FY10

Bio-fuel plant at Parbhani (30kl/day)

0.5

Q2FY09

Khet Se - 50 stores

7.5

FY10-11

Gypsum blockwall plant (Haldia)

0.3

NA

Khet Se TCL's plan to operate two stores initially. The first store is likely to be operational at Ludhiana from Q1FY09 while the second store is due to be opened in Navi Mumbai. It plans to incur a capex of Rs7.5bn for opening 50 stores pan-India in the next 2-3 years. Bio-fuel The construction of pilot plant for producing 30 kiloliters/day of bio-fuel will be completed by Nov '09. The plant, which is being set up by Praj Industries will be scaled up to 100 kl/day. TCL has entered in contract farming for cultivation of Jatropha and Sweet Sorghum for production of bio-fuel. Tanzania project Apart from the above mentioned projects, TCL also plans a 0.5 mt natural soda ash project in Tanzania, which has been delayed due to environmental concerns. TCL is contemplating various options for erection of the facility near Lake Natron. OUTLOOK Positive changes in urea policy aimed at rationalising subsidies helped TCL improve recoveries. Further changes in the policy are expected, which is likely to enhance the profitability profile of the sector.

4

5

Continuous delay at Magadi and increasing cost to impact performance...

We revise downward our recommendation to ‘HOLD’ ...

Soda ash demand has declined in US due to slow down in construction activities; however the buoyant construction activity in China, South East and Middle East Asia will keep the prices firm in the region. Besides, soda ash prices are likely to remain firm in the region on account of supply shortages caused by dislocation of plants in China and US due to environmental concerns. Around 50% of TCL's soda ash sales contracts from Mithapur plant are on long-term, which are renewed annually. In FY07, the company had contracted at a price of ~USD190/ mt as against the current spot prices of USD250-300/mt, we expect improvement in realisation by USD20-25/mt during Q1FY09 which will improve the profitability. Stabilization of the new plant at Magadi from Q2FY09 will add 220k mt of natural soda ash in FY09 (350k mtpa). However, the performance of BMG has been continuously marred due to delay in production from the new plant, rising cost, low realizations, restructuring and political unrest in Kenya. BMG has suffered substantial loss of profit due to delay and shutdown as the price of the commodity is at the peak of the cycle. Phosphoric acid and sulphur prices are likely to soften from the current levels but may not retrace to the earlier levels, consequently the profitability of IMACID is likely to stabilize. Due to lack of clarity, we have not factored in any earnings from GCIP, the new acquisition. The de-bottlenecking of Babrala plant will increase the urea capacity by ~350k mtpa. Modernisation at mithapur plant is expected to increase production of soda ash and salt by ~5%. Production from the new capacity at Magadi is also likely at full capacity from Q2FY09. Renewal of soda ash contracts at Mithapur and Magadi will improve the realisations. Realisations from IMACID are likely to increase due to substantial rise in phosphoric acid prices. Considering the above, we expect consolidated net sales to climb by 9% to Rs63bn and by 15% to Rs73bn in FY08 & FY09 respectively. We expect high realisations to be set off by high input cost, hence OPM is likely to be ~17% in FY08. However, we expect growth in revenue to outpace input cost and OPM should improve to 18% in FY09. TCL should be able to post an operating profit of Rs10.8bn in FY08 and Rs13.1bn in FY09. Capital charges are expected to escalate due to commissioning of new plant at Magadi and debottlenecking. As a result, we expect net profits to grow by 5.9% to Rs5.4bn in FY08 and by 32% to Rs7.1bn in FY09. VALUATIONS At the CMP of Rs273, TCL is trading at a P/E of 9.3x, EV/Sales of 1.0x and EV/EBIDT of 5.0x its FY09E consolidated estimates. We believe that full capacity utilisation at Magadi and higher realisations should enable BMG to generate improvement in OPM. Expansions at Babrala should further help deliver a better performance. However, continuous delay in efficient utilisation of new plant at Magadi, increasing direct costs and capital charges dilute the valuation of the company. The current CMP of Rs273, fairly values the earning potential of TCL. Hence, we downgrade our recommendation to 'HOLD'. CONCERNS 1. Adequate availability of gas at feasible prices is crucial for optimal performance of the fertiliser business and shortage of the same will impact profitability. 2. The chemicals and complex fertiliser business has high sensitivity to prices of phosphoric acid, coke, sulphur and sodium compounds. Thus, any adverse movements in price cycle of raw materials and products will hamper performance. 3. Continued increase in subsidy arrears and consequent stretching of working capital cycle will impact financing costs. 4. Any delay or stoppage in production at the new or existing capacities will impede performance. Company description: Tata Chemicals Limited is India’s leading manufacturer of inorganic chemicals. It also manufactures fertilisers and food additives. Incorporated in 1939, the company has an annual turnover of over Rs58bn and is a part of the Rs900bn (USD22bn) Tata Group, India’s foremost business conglomerate. 5

6

Financial Results for the quarter & nine months ended 31 December 2007 (Standalone) Quarter Ended

Particulars (Rs mn) Net Sales Total Expenditure

Nine Months Ended

Year Ended

31/12/07

31/12/06

Gr %

31/12/07

31/12/06

Gr %

31/03/07

12,240 10,195

13,073 11,308

(6.4) (9.8)

31,448 25,712

31,879 26,689

(1.4) (3.7)

39,910 33,043

623

2,523

-

1,252

1,510

-

82

4,572

3,890

(19.0)

11,979

11,834

(0.8)

16,093

(Inc)/dec in stock in trade Consumption of raw material Staff cost

392

382

2.5

1,211

1,072

13.0

1,490

Cost of traded goods

899

1,534

(41.4)

2,410

3,642

(33.8)

3,905 1,807

Stores, Spare Parts & Consumed Power and Fuel

478

532

(10.0)

1,292

1,370

(5.7)

1,608

1,021

57.5

3,245

2,958

9.7

3,922

746

752

(0.7)

2,048

2,075

(1.3)

2,743

Freight & Forwarding Charges Other expenditure

877

675

30.0

2,275

2,228

2.1

3,002

Operating profit

2,046

1,765

15.9

5,736

5,191

10.5

6,867

125

323

(61.4)

689

851

(19.1)

943

2,171

2,089

3.9

6,425

6,042

6.3

7,810

39

42

(6.7)

53

81

(34.8)

48

373

392

(4.9)

1,107

1,122

(1.3)

1,504

1,759

1,655

6.3

5,265

4,839

8.8

6,259

537

478

1,709

1,440

1,846

-

1

33

34

51

13

9

-

-

-

(46)

-

(369)

(132)

(80)

Net Profit

1,255

1,167

3,892

3,498

Equity Capital (F.V. Rs 10)

2,310

2,152

2,310

2,152

Diluted equity

2,435

2,435

2,435

2,435

2,435

-

-

-

-

21,777

EPS for the period (Rs)

5.4

5.4

16.8

16.3

20.6

Diluted EPS (Rs)

5.2

4.8

16.0

14.4

18.2

Book Value (Rs)

-

-

-

-

99.4

OPM (%)

16.7

13.5

18.2

16.3

17.2

NPM (%)

10.3

8.9

12.4

11.0

11.1

Other Income PBDIT Interest Depreciation PBT & extra-ordinary items Provision for current tax Provision for deferred tax Fringe benefits Extraordinary items

Reserves (excl. rev. res.)

7.6

11.3

4,442 2,152

Expenditure (% of Net Sales) Raw materials (incl. stock adj.)

42.4

49.1

42.1

41.9

40.5

Staff cost

3.2

2.9

3.9

3.4

3.7

Cost of traded goods

7.3

11.7

7.7

11.4

9.8

Stores, Spare Parts & Consumed

3.9

4.1

4.1

4.3

4.5

Power and Fuel

13.1

7.8

10.3

9.3

9.8

Freight & Forwarding Charges

6.1

5.8

6.5

6.5

6.9

Other expenses

7.2

5.2

7.2

7.0

7.5

Median PE v/s Daily PE Daily PE

PE Band

Median PE

500

20

18x

375

15 10

250

5

125

0 Feb-04

Feb-05

Feb-06

Feb-07

Feb-08

0 Feb-04

15x 12x 9x 6x

Feb-05

Feb-06

Feb-07

Feb-08 6

7

Financial Results for the quarter & nine months ended 31 December 2007 (Consolidated) Particulars (Rs mn)

Quarter Ended

Nine Months Ended

Year Ended

31/12/07

31/12/06

Gr %

31/12/07

31/12/06

Gr %

31/03/07

17,001

17,804

(4.5)

45,628

45,663

(0.1)

58,096

14,411

15,130

(4.8)

37,651

38,248

(1.6)

47,991

525

2,533

1,015

1,607

Consumption of raw material

5,415

4,656

(17.4)

14,630

14,226

(1.2)

19,320

Staff cost

1,124

1,017

10.5

3,179

2,812

13.0

3,480

Cost of traded goods

918

1,578

(41.8)

2,441

3,774

(35.3)

4,071

Stores, Spare Parts & Consumed

558

729

(23.5)

1,651

1,879

(12.1)

2,445

Power and Fuel

2,889

1,970

46.6

6,488

5,715

13.5

7,640

Freight & Forwarding Charges

1,338

1,168

14.6

3,776

3,426

10.2

4,602

Other expenditure

1,643

1,480

11.0

4,472

4,810

(7.0)

6,217

Operating profit

2,591

2,674

(3.1)

7,977

7,415

7.6

10,105

125

133

(5.8)

690

973

(29.1)

996

2,716

2,807

(3.2)

8,667

8,388

3.3

11,101

Interest

446

214

108.9

974

589

65.3

962

Depreciation

793

711

11.4

2,345

1,999

17.3

2,739

1,478

1,882

(21.5)

5,348

5,800

(7.8)

7,400

461

563

1,718

1,618

2,297

-

-

-

-

53

Fringe benefits

13

9

33

34

51

Extraordinary items

93

(248)

(770)

(132)

(81)

911

1,559

4,367

4,280

Equity Capital (F.V. Rs 10)

2,310

2,152

2,310

2,152

2,152

Diluted equity

2,435

2,435

2,435

2,435

2,435

-

-

-

-

23,567

EPS for the period (Rs)

3.9

7.2

18.9

19.9

23.6

Diluted EPS (Rs)

3.7

6.4

17.9

17.6

20.9

Book Value (Rs)

-

-

-

-

119.5

15.2

15.0

17.5

16.2

17.4

5.4

8.8

9.6

9.4

8.7

34.9

40.4

34.3

34.7

33.6

Staff cost

6.6

5.7

7.0

6.2

6.0

Cost of traded goods

5.4

8.9

5.4

8.3

7.0

Stores, Spare Parts & Consumed

3.3

4.1

3.6

4.1

4.2

17.0

11.1

14.2

12.5

13.1

Freight & Forwarding Charges

7.9

6.6

8.3

7.5

7.9

Other expenses

9.7

8.3

9.8

10.5

10.7

Net Sales Total Expenditure (Inc)/dec in stock in trade

Other Income PBDIT

PBT & extra-ordinary items Provision for current tax Provision for deferred tax

Net Profit

Reserves (excl. rev. res.)

OPM (%) NPM (%)

(41.6)

215

2.0

5,080

Expenditure (% of Net Sales) Raw materials (incl. stock adj.)

Power and Fuel

7

8

Segmentwise results for the quarter & nine months ended 31 December 2007 (Consolidated) Particulars (Rs Mn)

Quarter Ended

Nine Months Ended

Year Ended

31/12/07

31/12/06

Gr %

31/12/07

31/12/06

Gr %

31/03/07

Inorganic Chemicals

8,400

7,909

6.2

23,374

23,551

(0.8)

31,513

Fertilisers

8,601

9,895

(13.1)

22,254

22,112

0.6

26,583

17,001

17,804

(4.5)

45,628

45,663

(0.1)

58,096

-

-

-

-

-

-

-

17,001

17,804

(4.5)

45,628

45,663

(0.1)

58,096

1,029

1,420

(27.5)

3,084

3,937

(21.7)

5,323

995

771

29.0

3,189

2,165

47.3

2,728

2,024

2,191

(7.6)

6,273

6,102

2.8

8,050

Less: Interest

446

214

108.9

974

589

65.3

824

Less: Other Unallocable

193

(153)

(226.2)

(819)

(420)

95.2

(255)

1,385

2,130

(35.0)

6,118

5,933

3.1

7,481

24,330

25,952

(6.2)

24,330

25,952

(6.2)

27,031

9,022

15,705

(42.6)

9,022

15,705

(42.6)

16,832

18,006

8,925

101.7

18,006

8,925

101.7

3,620

51,358

50,582

1.5

51,358

50,582

1.5

47,484

Inorganic Chemicals

16.9

21.9

16.9

20.2

19.7

Fertilisers

44.1

19.6

47.1

18.4

16.2

Total

15.8

17.3

16.3

16.1

17.0

Inorganic Chemicals

12.3

18.0

13.2

16.7

16.9

Fertilisers

11.6

7.8

14.3

9.8

10.3

Total

11.9

12.3

13.7

13.4

13.9

Chemicals

49.4

44.4

51.2

51.6

54.2

Bulk Fertilisers

50.6

55.6

48.8

48.4

45.8

Chemicals

50.8

64.8

49.2

64.5

66.1

Bulk Fertilizers

49.2

35.2

50.8

35.5

33.9

Segment Revenue

Total Less: Inter-segment sales Net Sales

PBIT Inorganic Chemicals Fertilisers Total

PBT

Capital Employed Inorganic Chemicals Fertilisers Unallocable Total

ROCE (%)

PBIT Marg (%)

Sales Mix (%)

PBIT Mix (%)

8

9

Year Ended March (Figures in Rs mn) Income Statement

2005

2006

2007

2008E

2009E

Revenues

30,081

40,344

58,096

63,404

72,749

Growth (%)

-

34.1

44.0

9.1

14.7

24,926

32,779

47,991

52,592

59,620

5,155

7,565

10,105

10,812

13,128

-

46.7

33.6

7.0

21.4

Interest & dividend income

1,017

1,003

996

1,193

1,732

EBIDT

6,173

8,568

11,101

12,004

14,861

246

482

962

1,048

931

(-) Depreciation

1,377

1,840

2,739

2,890

3,253

PBT & extraordinary items

4,550

6,246

7,400

8,067

10,677

(-) Tax provision

1,124

1,723

2,401

2,686

3,556

Net Profits

3,406

4,283

5,080

5,381

7,122

244

244

244

244

244

82

91

106

146

164

Basic EPS (Rs)

15.8

19.9

23.6

25.0

33.1

Diluted EPS (Rs)

14.0

17.6

20.9

22.1

29.2

2005

2006

2007

2008E

2009E

Equity Share Capital

2,152

2,152

2,152

2,436

2,436

Reserves & Surplus

17,827

20,042

23,567

33,164

37,573

Net worth

19,978

22,194

25,718

35,600

40,009

Total Debt

13,242

18,277

18,642

13,600

13,000

3,534

3,230

2,912

2,912

2,912

-

239

211

211

211

36,754

43,939

47,484

52,324

56,132

Fixed Assets

15,624

27,794

30,561

30,171

29,918

Net current assets

11,726

2,588

926

6,155

10,216

9,387

5,475

7,753

7,753

7,753

-

936

576

576

576

17

70

37

37

37

36,754

43,939

47,484

52,324

56,132

Total Expenditure Operating Profit

Growth (%)

(-) Interest

Fully diluted Eq. sh. O/s (mn no) Book Value (Rs)

Balance Sheet

Deferred Tax liability Deferred Capital Grants Capital Employed

Investments Deferred Tax Assets Misc exp. Total Assets

9

10

Year Ended March (Figures in Rs mn) Cash Flow Statement

2005

2006

2007

2008E

2009E

PBT & extraordinary items

4,550

6,246

7,400

8,067

10,677

Depreciation

1,377

1,840

2,739

2,890

3,253

Interest & dividend inc.

(318)

(536)

(920)

(1,193)

(1,732)

246

312

944

1,048

931

(287)

(219)

(480)

-

-

42

(875)

(2,144)

(2,686)

(3,556)

493

(5,121)

1,612

(5,306)

(3,986)

6,103

1,648

9,151

2,819

5,587

(692)

(1,893)

(5,204)

(2,500)

(3,000)

(2,727)

(5,887)

(2,255)

-

-

415

703

923

1,193

1,732

(3,004)

(7,077)

(6,536)

(1,307)

(1,268)

Issue of eq. shares

-

-

-

-

-

Preference Shares Repaid

-

-

-

-

-

5,448

1,004

369

1,651

(600)

Dividend paid

(1,338)

(1,589)

(1,716)

(2,191)

(2,713)

Interest paid

(419)

(557)

(953)

(1,048)

(931)

Cash from financing activities

3,691

(1,142)

(2,300)

(1,588)

(4,244)

Inc/Dec. in cash

6,790

(6,571)

316

(76)

75

2005

2006

2007

2008E

2009E

EBIDT (%)

20.5

21.2

19.1

18.9

20.4

ROACE (%)

13.2

18.0

20.0

19.2

22.5

ROANW (%)

17.0

20.3

21.2

17.5

18.8

Sales/Total Assets (x)

0.8

0.9

1.3

1.2

1.3

Debt:Equity (x)

0.7

0.8

0.7

0.4

0.3

Current Ratio (x)

2.5

1.2

1.0

1.3

1.5

Debtors (days)

51

66

58

68

72

Inventory (days)

71

77

48

47

44

Net working capital (days)

135

22

6

34

51

EV/Sales (x)

2.0

1.8

1.2

1.2

1.0

EV/EBIDT (x)

9.9

8.4

6.5

6.3

5.0

P/E (x)

19.5

15.5

13.1

12.4

9.3

P/BV (x)

3.3

3.0

2.6

1.9

1.7

Interest paid Misc Exp W/off Tax paid (Inc/Dec in working capital Cash from operations Net capital expenditure Net investments (incl sub.) Interest & dividend recd Cash from investing activities

Change in debt

Key Ratios

10

11

Team Equity Desk R. Baskar Babu - Head - Equity Broking [email protected] 91-22-66186465 Gealgeo V. Alankara - Head - Institutional Sales [email protected] 91-22-66186466 Sachin Kasera - Co-Head - Domestic Equities [email protected] 91-22-66186464 Sailav Kaji - Head - Derivatives & Strategist [email protected] 91-22-66186344

Research

Ashish Dangi - Associate - Lifestyle / Retail Products [email protected] 91-22-66186481 Ashwani Agarwalla - Associate- Agro Products /Fertilizers [email protected] 91-22-66186482 Abhishek Gangwani -Associate - Electronics / Hardware [email protected] 91-22-66186385 Naveen Trivedi - Associate - Speciality Chemicals [email protected] 91-22-66186384 Abhinav Bhandari - Associate - Real Estate / Construction [email protected] 91-22-66186371 Anand Rajgarhia - Associate - Shipping / Logistics [email protected] 91-22-66186377

Sameer Ranade - Capital Goods / Utilities [email protected] 91-22-66186381

Sales:

Sujit Jain - Real Estate / Construction [email protected] 91-22-66186379

Anil Chaurasia 91-22-66186483

Alok Doshi 91-22-66186484

Amol Rao - Hospitality / Pipes / Packaging [email protected] 91-22-66186378

Sapna Mehta 91-22-66186485

Sundeep Bhat 91-22-66186486

Nirav Shah - Sugar / Textiles [email protected] 91-22-66186383

Dealing:

Rishabh Bagaria - Auto / Auto Ancilliary [email protected] 91-22-66186391

Chandrakant Ware/Rajesh Khanna/Shivkumar R/Ashok Savla [email protected] 91-22-66186326

Ruchir Desai - Technology [email protected] 91-22-66186372

Raju Bhavsar / Manoj Parmar / H Prajapati / Pratiksha [email protected] 91-22-66186323

Syed Sagheer - Logistics / Light Engineering [email protected] 91-22-66186390

Directors

Chandana Jha - Banking / Financial Services [email protected] 91-22-66186398

Gaurang Gandhi [email protected]

91-22-66186400

Rahhul Aggarwal - Metals [email protected] 91-22-66186388

Hemang Gandhi [email protected]

91-22-66186400

Dipti Solanki - Media [email protected] 91-22-66186392

Ketan Gandhi [email protected]

Faisal Memon - Associate - Metals [email protected] 91-22-66186389

Rakesh Bhatia - Head Compliance [email protected] 91-22-66186400

91-22-66186400

11

12

Infinity.com bright thinking

Financial Securities Ltd SMALL WORLD, INFINITE OPPORTUNITIES

Member : Bombay Stock Exchange & National Stock Exchange of India Ltd. : Sebi Reg No: INB 010989331. Clearing No : 211 1216, Maker Chambers V, Nariman Point, Mumbai - 400 021; Tel.: 91-22-66186633/6400 Fax : 91-22-22049195 Disclaimer: This document has been prepared by the Research Desk of M/s Infinity.com Financial Securities Ltd. (PINC) and is meant for use of the recipient only and is not for public circulation. 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 its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors The information contained herein is obtained and collated from sources believed reliable and PINC has not independently verified all the information given in this document. Accordingly, no representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The opinion expressed or estimates made are as per the best judgement as applicable at that point of time and PINC reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval PINC, its affiliates, their directors, employees and their dependant family members may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the document This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of PINC. The views expressed are those of analyst and the PINC may or may not subscribe to all the views expressed therein This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. Neither this document nor any copy of it may be taken or transmitted into the United State (to U.S.Persons), Canada, or Japan or distributed, directly or indirectly, in the United States or Canada or distributed or redistributed in Japan or to any resident thereof. The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions Neither PINC, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Copyright in this document vests exclusively with PINC and this document is not to be reported or circulated or copied or made available to others.

12

13

TATA CHEMICALS LTD. Gearing up for a big leap... Company Update

SUMMARY COMPANY DETAILS Auditors

M/s S B Billimoria & Co M/s N M Raiji & Co Ratan N Tata Bombay House, 24 Homi Mody Street Fort Mumbai - 400001 www.tatachemicals.com

Chairman Reg. Office

Website

S C R I P D E TA I L S Market Capitalisation Book Value per share Equity Shares O/S (F.V. Rs. 10) Median Volumes (12 mths) 52 Week High/Low BSE Scrip Code NSE Scrip Code Bloomberg Code Reuters Code

Rs.53 bn Rs.120 215.2 mn 260,983 Rs. 270 / 187 500770 TATACHEM TTCH@IN TTCH.BO

SHAREHOLDING PATTERN (%) Qtr. Ended Promoters Banks/FIs/MFs FIIs/NRIs/OCBs PCBs Indian public

Dec-06 31.6 30.9 4.2 5.2 28.2

Mar-07 31.6 30.4 5.4 5.0 27.7

Jun-07 31.6 30.3 6.2 5.0 26.9

KEY FINANCIALS Rs Mn

Qtr End. (Standalone)

Year Ended (Cons.)

Dec-06 Mar-07 Jun-07

2007 2008E* 2009E*

Net Sales 13,073 YoY Gr. (%) 3.9 Op. Profits 1,765 Op. Marg. (%) 13.5 Net Profits 1,167 Equity Capital 2,152

8,031 6.5 1,544 19.2 944 2,152

6,689 58,096 (11.4) 44.0 1,632 10,105 24.4 17.4 1,212 5,080 2,152 2,152

65,406 12.6 11,172 17.1 6,078 2,435

73,053 11.7 12,890 17.6 7,188 2,435

„

Tata Chemicals Ltd (TCL), a leading manufacturer of inorganic chemicals & fertilisers operates the largest inorganic chemical complex at Mithapur in Gujarat.

„

TCL also operates an urea plant in Babrala. With merger of Hind Lever Chemicals Ltd (HLCL) in 2004, TCL ventured in manufacturing of complex fertiliser at HLCL’s plant at Haldia.

„

TCL acquired 100% stake in Brunner Mond Group Ltd, (UK) in FY06 at an enterprise value of Rs~16 bn.

„

TCL acquired 33% stake in Indo Maroc Phosphore S.A. (IMACID), Morocco for a consideration of Rs ~1.7 bn to ensure uninterrupted supply of phosphoric acid, a key raw material.

„

IMACID is a JV with Chambal Fertiliser & Chemicals Ltd and Office Cherifien des Phosphates, Morocco (OCP) as the other two partners with equal stake.

„

In FY07, TCL made a foray into manufacturing bio-fuels and is setting up a plant at Parbhani (Maharashtra) for manufacturing bio-ethanol.

„

The new capacity at Magadi could not be commissioned commercially due to refractory design problems.

„

TCL plans to invest Rs 4.5 bn in next 3 years for expansion of soda ash, cement, salt and fertiliser capacity domestically.

„

In Q1FY08, sales fell by 11% to Rs ~6.7 bn. Operating profit increased by 3% to Rs 1.6 bn while net profits grew by 61% to Rs 1.2 bn.

„

At CMP of Rs 245, TCL is trading at a P/E of 8.3x, EV/Sales of 0.9x and EV/EBIDT of 4.7x discounting its FY09E consolidated estimates. With its expansions underway, TCL should deliver a superior performance. We reiterate our ‘BUY’ recommendation with a price target of Rs 320 on a one year investment horizon.

KEY RATIOS (CONSOLIDATED) Year Ended (March) 2007* 2008E* 2009E*

EPS (Rs.)

ROCE (%)

RONW (%)

20.9 24.9 29.5

20.0 20.0 21.6

21.2 19.6 18.6

P/E EV/Sales EV/EBIDTA (x) (x) (x) 11.7 9.8 8.3

1.1 1.0 0.9

6.0 5.5 4.7

* Equity diluted for FCCB conversion

Aug 28, 2007

Sensex : 14919

Analyst - Ashwani Agarwalla

Nifty : 4321

CMP : Rs 245

Recomm : BUY

1

14

TATA CHEMICALS LTD.

P L A N T L O C AT I O N

Business Profile Tata Chemicals Ltd

Fertilisers

Inorganic Chemicals Plant at Mithapur, Gujarat

International Soda ash & Sodium bicarbonate

Domestic Plant at Mithapur, Gujarat

SodaSoda Ash Ash Capacity-0.9 mn mtpa Salt Capacity- 0.5 mn mtpa

BMG Capacity-1.7mn mtpa. Operations in Uk, Netherlands & Kenya

Lake Natron, Tanzania Feasibility study undertaken

New Initiative

Urea - Plant at Babrala capacity -0.9 mn mtpa

Khet Se Distribution of fresh produce

Complex Fert. Plant at Haldia capacity-0.8 mn mtpa

2 centers to be set up at Kolkata & Ludhiana Bio-fuel

IMACID JV in Morocco for sourcing of phosphoric acid

Cement Capacity-0.5 mn mtpa

Plant to be set at Parbhani, research center established at Pune

Other alkaline chemicals Source: PINC Research

Mithapur (Kutch, Gujarat)

Plant locations

The Mithapur plant is located on the coast of Gujarat and was commissioned in 1927 for manufacturing of synthetic soda ash. Presently it manufactures soda ash (capacity-917k mtpa), chloro-caustic chemicals, marine chemicals, salt (capacity-550k mtpa) and cement (capacity-440k mtpa).

TCL has seven manufacturing units, 3 in India , 3 in Europe and 1 in Kenya. Synthetic soda ash and other inorganic chemicals are produced at Mithapur plant (Gujarat), urea is manufactured at Babrala (UP) and complex fertiliser is manufactured at Haldia (West Bengal). The European plants manufacture synthetic soda ash while the plant in Kenya produces natural soda ash.

Scrip performance vis-a-vis BSE Sensex Vol.in '000s (NSE+BSE)

TCL

IMACID 5%

250

1,000

215

500

180

0

Soda Ash (BMG) 27%

Soda Ash (India) 13% Salt 6% Cement 3%

Others 9%

Aug-07

1,500

May-07

285

Feb-07

2,000

Nov-06

Consolidated Rev. Break Up - FY07 (Rs 58 bn)

BSE (Rebased)

320

Aug-06

The plant has been located strategically at the coast of Gujarat. It is near the Kandla port which facilitates cheap and quick transportation.

Urea 15% Complex fertilisers 22%

Source: Company

2

15

TATA CHEMICALS LTD.

P L A N T L O C AT I O N

Consequently, it has been able to increase production of soda ash by ~5% and it also plans to rationalise operating costs.

Plant Locations

Babrala (UP) TCL predominantly operated in inorganic chemical industry till 1994 when it set up a dual feedstock urea plant at Babrala (UP).

Babrala Mithapur

Haldia

The plant is strategically located to cater to the high fertilizer consuming belt of north and east India. The chief markets of TCL are Punjab, Haryana, Uttar Pradesh, Jharkhand, Bihar and West Bengal. The plant manufactures urea and ammonia with rated capacity of 865k mtpa and ~500k mtpa respectively. Haldia (West Bengal)

Source: Company

Soda ash is manufactured using the Solvay process. Availability of salt is the main reason for the soda ash industry being concentrated in the Kutch region as Gujarat accounts for ~70% of India’s salt production of ~20 mn mt.(~1.7 mt to 1.9 mt of salt is required for production of 1 mt of soda ash) The coastal region of Gujarat has adequate flat land for construction of solar pond required for production of salt. Limestone is a key raw material in manufacturing soda ash as it is a reactant for extracting soda ash from the ammoniated brine. (~1.4 mt to 1.7 mt of limestone is used for production of 1 mt of soda ash) In India, limestone is concentrated in four regions viz. Andhra Pradesh, Gujarat, Karnataka and UP. TCL has captive capacity for mining limestone in the Kutch region, which ensures steady supply. Apart from ensuring a steady supply, a captive source also helps minimise operating costs. It also sources additional requirements from Rajasthan or imports from Oman. In CY02, TCL had undertaken a program ‘Manthan’ for enhancing efficiency and cost rationalisation across the board. Motivated by the success of Manthan, in FY07 TCL undertook ‘Udaan’ ,a program in consultation with 'Mckinsey’ for increasing efficiency and cost rationalisation at Mithapur plant.

Till CY04, TCL was a dominant player in the urea industry, the merger of HLCL marked its foray in complex fertilisers. The integrated plant is located at the port town of Haldia, which helps reduce freight cost owing to the high proportion of imported raw materials (phosphoric acid, rock phosphate) for manufacturing complex fertilizers. Its product profile includes complex fertilizers, sulphuric acid, and phosphoric acid. It has a total production capacity of ~0.8 mn mtpa of complex fertilizers. Northwich (UK), Netherlands and Kenya With acquisition of BMG in 2005, TCL acquired the 4 soda ash producing units of the company. Two plants are located in Northwich, UK (capacity-900k mtpa) and one in Netherlands (capacity-300k mtpa) where synthetic soda ash is manufactured using the solvay process. The European operations have a higher operating cost due to high labour and fuel costs. The fourth plant is located at Lake Magadi, Kenya (capacity-720k mtpa including the new 350k mt capacity) where natural soda ash is produced. The new capacity of 350k mtpa could not be commissioned due to refractory design problems. IMACID TCL entered in a 33% JV with Office Cherifien des Phosphates, Morocco (OCP) and Chambal fertilisers & Chemicals Ltd for sourcing phosphoric acid. The plant has a capacity of 350k mtpa. TCL has entered in a volume contract with IMACID, the price of phosphoric acid is fixed annually.

3

16

TATA CHEMICALS LTD.

BUSINESS SEGMENTS Business Segments

Manufacturing processes of soda ash

The business of TCL can be broadly divided in two segments viz. inorganic chemicals and fertilizers.

Solvay Process

Inorganic chemicals business constitute soda ash, salt, cement and alkaline chemicals while fertiliser portfolio comprises urea and complex fertilisers. Inorganic chemicals contributed 54% to the revenue and 66% to the profitability of TCL while the fertiliser division contributed 46% to the revenue and 34% to the profitability of TCL. Indian inorganic chemical division contributed 25%, fertiliser division 42% to the revenue of TCL and together the two divisions contributed 84% to the profitability. BMG and IMACID contributed 28% and 5% to the revenue while their contribution to profitability was 12% and 4% respectively. Soda Ash-'The high potential business' In FY07, the Indian division of TCL earned a revenue of Rs 7.5 bn from sales of 722k mt of soda ash which accounted for 50% of the inorganic chemical division and 18% of total revenue. TCL has consistently maintained its leadership position and commands a 32% market share of Indian soda ash industry. TCL manufactures synthetic soda ash at Mithapur through the ‘Ammonia-Soda’ process also known as the ‘Solvay Process’, which uses limestone, salt and coke as the key raw materials. It has expanded capacity in the last 6 months from 875k mtpa to 917k mtpa and is further expanding it to ~1.2 mn mtpa. This additional capacity is likely to be commissioned in Q4FY09.

Soda Ash Sales (mn mt) & Realisation (Rs/mt) Soda ash (quantity -mn mt)

Realisation/ mt

1.0

13,500 10,916 11,134 0.8

0.7

0.7

0.7

12,000 10,500 9,000

8,641

Source: PINC Research

FY09E

FY08E

FY07

FY06

7,500 FY05

8,297

7,975 FY04

0.7

0.6

FY03

0.7

0.7

10,176

0.8

10,446

0.8

0.9

Saltwater (Brine) is reacted with ammonia to obtain ammoniated brine. The brine is then passed through activated carbonators, where the brine reacts with carbon di-oxide and forms sodium bicarbonate slurry. Through use of centrifugal force, sodium bicarbonate crystals are collected from the slurry. The crystals are then passed through steam tube drier to form soda ash. Limestone and coke are mixed in vertical shaft kilns which yields carbon dioxide. Ammonia is recovered from the solution of ammonium chloride and sodium chloride. TCL uses Solvay process for production of soda ash at the mithapur plant. The process uses more raw materials and heat and generates higher wastage as compared to other processes, hence it incurs a higher cost as compared to other process. Producers with newer plants enjoy a lower cost due to improved efficiency owing to better technology.

Solvay Process Ammonia Limestone

Ammonia Absorber

Salt

Coke Carbonating Tower

Lime Kiln Lime

Ammonia Recovery

Calcium Chloride

CO2 Bicarbonate Filter

Bicarbonate Calciner

Light Soda Ash

Modified Solvay Process or Dual Process In the modified process there is a better utilisation of salt and it also generates lesser waste. Dry Liming Process Dry Lime process consumes lesser raw materials and has a perfect steam and power balance which results in substantial energy saving.

4

17

TATA CHEMICALS LTD.

BUSINESS SEGMENTS

Domestic Demand Supply Position (mn mt) Domestic Production

2.2 2.3 FY06

3.1

3.0 2.7

2.8 2.2 2.3 FY05

2.4

2.1 2.2

2.0 2.1

2.0

1.9 1.9

2.5

FY04

3.0

3.1

Demand 3.5

FY09E

FY08E

FY07

FY03

1.5 FY02

Domestic scenario Soda ash is mainly used by detergent & soap, glass, paper & pulp, metal and textile industries. Detergent and soap industry uses light soda ash and this sector consumes 32% of soda ash manufactured in India. The demand for soap and detergent is relatively inelastic to income and price since these products are necessities to a large extent. While growing population generates demand at a base rate, rising hygiene consciousness results in incremental demand for the products. Considering the above, we expect the soap & detergent industry to grow by ~45% over the next few years.

Source: Crisinfac & PINC Research

Peaking capacity utilisation and stable prices

Soda Ash Consumption in India (CY06) Soaps & Detergents 32%

Others 27%

Chemicals 9% Silicates 11%

Glass 21%

Source: Crisinfac

The glass industry accounts for 21% of the total demand for soda ash. Due to acceleration in construction activity over the last few years along with rising demand for automobiles has resulted in higher offtake of soda ash. For last 3 years the industry grew at a rate of ~10%, we expect the glass industry to grow by ~11% annually over the next few years.

Soda Ash Domestic Market Share (CY06) Nirma 26%

GHCL 22%

TAC 5% DCW 4% Others 11% TCL 32%

Source: Company

Presently, the soda ash industry is operating at ~90% capacity utilisation. While an additional ~700k mt is expected in next two years, but a steady increase in demand is likely to help sustain prices at around current levels of ~Rs 10,000/mt. Domestic demand for soda ash was ~2.8 mn mt in FY07 as compared to production of ~2.4 mn mt with the difference being met through imports. Imports largely cater to demand emanating from the coastal consuming regions, which find it more economical (in terms of freight) to import vis-a-vis transporting from other parts of country. The demand for soda ash is expected to grow at a CAGR of ~5% over the next few years owing to the buoyancy in demand in consuming sectors like soaps, detergents and glass. Thus, we expect demand to grow to 3.3 mn mt in FY10. Global scenario Globally, the total demand for soda ash is 43 mn mtpa which is likely to grow at a rate of 4% due to higher demand from Asian and East European countries. US and China account for more than 50% of global production owing to abundance of natural soda ash, flat land and long coastline in these countries. Presence of natural soda ash is limited to US, Kenya, Tanzania and Ukraine & parts of China. As a result, bulk of consumers have to rely on synthetic soda ash, which accounts for 73% of the world production. Against the concentration of natural soda ash in the above nations, the bulk of demand is emanating from Southeast Asia and Middle East.

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BUSINESS SEGMENTS

Major Exporting & Importing Countries

z

C

USA

Eur

ope

z

z z

Synthetic Soda Ash

al entr

z

z

Latin America

z z

z Eastern Asia z

China

z

z Africa

z Australia

Natural Soda Ash Exporting Hubs

z Importing Hubs Source: World Soda Ash Conference & PINC Research

While cost of producing natural soda ash is ~50% of synthetic soda ash, the high freight costs in transporting natural soda ash from US and Africa to the Asian region restricts the supply . Also, there is increasing pressure on some US-based soda ash players due to environmental considerations. Further, 3 major Chinese manufacturers have been forced to relocate their plants due to environmental concerns, which are expected to take 18-24 months to recommence operations. Thus, global soda ash prices are expected to remain firm despite additional capacity of ~3 mn mt to be commissioned in Middle-east in the next couple of years, growing demand is likely help prices stabilize at current levels of ~$200 /mt. Consumption pattern and export opportunities As compared to a 21% share in India, glass industry globally accounts for 51% of soda ash manufactured while detergents constitute 11% of demand. The increasing construction activity in China led by Olympics and World Trade Fair is driving offtake of glass.

TCL exports ~15% of its soda ash produce to the neighbouring, south east Asian countries and Oman & UAE in the middle east. Brunner Mond- 'Expanding capacity and markets' To set up a global footprint and to expand capacity, TCL acquired 100% stake in Brunner Mond Group in Feb‘06. This helped TCL expand its soda ash capacity by 1.6 mn mtpa.

Global Soda Ash Consumption (CY06) Glass 51%

Water treatment 2% Pulp & Paper 2% Soaps & Detergents 11%

Others 8%

Chemicals 26%

Source: Cris infac

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BUSINESS SEGMENTS

Europe

Africa

Total

We expect profitability to improve in FY08 as revenues from additional capacity will be reflected in FY08. TCL had undertaken a program 'STEP', which aimed at increasing efficiency and reducing costs.

Sales

1,209

364

1,573

Production

1,188

382

1,470

Restructuring staff cost

Brunner Mond Volumes in FY07 ('000 MT) Particulars

Source: Company

TCL acquired 100% stake in Brunner Mond Group Ltd, UK (BMG) in Feb’06 in two phases through its wholly owned subsidiary Homefield Pvt UK Ltd. for ~Rs 8 bn. BMG is engaged in manufacturing soda ash (sodium carbonate), which also yields sodium bicarbonate, calcium chloride and other alkaline chemicals. Globally, BMG has four plants, two plants in Northwich, UK (capacity-900K mt), one in Delfzijl, Netherlands (capacity-330K mt) and one in Magadi, Kenya (capacity-720K mt) which produces natural soda ash. In UK and Netherlands, synthetic soda ash is manufactured using brine, coke and limestone through the Solvay process (ammonia-soda process). In Q3FY07, BMG increased its capacity in Kenya by ~350k mtpa. It caters specially to the glass manufacturers as the soda ash manufactured here is refined to remove the fluoride content. Natural soda ash In Kenya, soda ash is extracted from trona (source for natural soda ash and is self replenishing) from lake Magadi. Trona is mineral deposit of hydrated sodium bicarbonate carbonate formed by evaporation of water, which is deposited on lake beds or beneath them. They occur naturally in US, Europe and parts of Africa. Trona is dredged from the lake and is then heated for producing soda ash. Trona is a self renewing resource depending upon the salinity of water and climatic conditions. Thus, higher salinity and hot conditions enable recovery of larger amounts of soda ash through evaporation. The company has extended the lease of Lake Magadi to 2053, which will ensure a steady supply of 1 mn mt of soda ash p.a. In FY07, BMG posted a revenue of Rs 16.5 bn with an operating profit of Rs 2.6 bn and net profit of Rs 630 mn. The European operations provide a lower margin due to higher labour cost and fuel charges. The OPM is less than 10% from European operations.

Further, to trim down its retirement costs, BMG has shifted from ‘defined benefit plan’ to ‘defined contribution plan’. As per the plan, BMG will have to contribute a defined amount to the retirement benefit fund and will now not be responsible for the performance of the fund and the returns thereon. At the time of acquisition of BMG, the pension fund had an unfunded liability of Rs. ~3.5bn, which is to be funded over a period of 10 years. Currently, the unfunded status is Rs 3.34 bn. Delay in new capacity at Magadi Due to teething problems, production at the new Magadi capacity could not be commercialised in Q1FY08 but the capital charges were accounted for, which impacted the profitability. . Production is likely to commence in Q3FY08 in a phased manner and achieve peak capacity utilisation by Q4FY08. (Production was planned to commence in Q3FY07, it has been delayed by over 3 quarters till date). TCL will market the additional production in the Asia-Pacific and South East Asian region. With acquisition of BMG, TCL has been able to expand its market significantly due to the cost and locational advantages. It now has a footprint in Europe and increased its presence in African and Mid-East region.

TCL & BMGL Combined Markets Asia

Europe

India

UK

Middle-East & Africa

Bangladesh

Oman

Netherlands

UAE

Germany

Kenya

Indonesia

France

South Africa

Thailand

Belgium

Nigeria

Pakistan

Sweden

Saudi Arabia

Philippines

Ireland

Morocco

Vietnam

Norway

Malaysia

Denmark

Srilanka

Source: Company Markets added through BMG

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BUSINESS SEGMENTS Little upside due to increased prices Lately, there has been an increase in spot prices (~$240/mt) of soda ash. TCL has entered in long term price contracts for >80% of production of soda ash, hence the firm prices are unlikely to contribute significantly to the profitability. Salt business-’The cash cow’ TCL is the market leader in branded edible salt industry with a market share of ~47% in the segment. It produces varieties of edible salt to cater to various consumer segments. The company manufactures salt at Mithapur (capacity of >0.5 mn mtpa) and the division contributes 9% to the total standalone revenues of TCL.

Salt Sales (mn mt) & Realisation (Rs/mt)

0.6 0.4

0.5 5,255

0.5

0.5

0.6

0.4

0.6

0.7

5,486

6,349

0.7

Realisation/ mt 0.6

Salt sales(quantity -mn mt)

7,000

6,418

6,500 6,000

5,766 5,449

5,500

5,051

5,000 FY09E

FY08E

FY07

FY06

FY05

FY04

FY03

0.3

Source: PINC Research

The domestic salt industry is dominated by the unorganised sector. The total domestic production is ~19.6 mn mtpa (edible & industrial), Gujarat, Tamil Nadu and Rajasthan contribute more than 90% of the total production. ~3.5 mn mt of salt is exported to Japan, Philippines, Indonesia, Malaysia, Nepal, and Bhutan etc.

Domestic Salt Industry Structure (mn mt)

Branded Salt Market Share Annapurna 22% Captain Cook 5% Tata Salt 47%

Aashirwaad 4%

Nirma 15% Others 7% Source: Company & PINC Research

The total domestic demand for industrial salt is ~8.5 mn mtpa while for edible salt it is ~7.7 mn mtpa. Iodised salt constitute ~4.9 mn mtpa (65% of the total edible salt) out of which only ~1 mn mt is branded. The domestic demand for edible salt is not likely to increase significantly, but rapid urbanization and development of organized retail sector has led to an increase in consumption of branded salt and there is an immense potential for growth in branded segment. In the last 4 years, TCL’s salt business has grown at a CAGR of 11% in terms of revenue. In FY07 it sold 475k mt of 'Tata Salt'. Total salt sales exceeded 0.5 mn mt and realised ~Rs 3.5 bn in revenues. To gain a stronger foothold in south India by targeting semi-urban & rural areas, TCL launched a new brand of salt "I-Shakti" priced competitively at Rs 2 less than the flagship brand. It also launched the 'Topp Salt' brand in FY05 for export to MiddleEast, Asia and African markets. Entry into new markets, introduction of variants and segmenting the customer is likely to boost the performance of the salt business. Cement-’Adding value’

Exports 3.8

Unbranded 6.7 Edible Salt 7.7

The cement division is a part of the inorganic chemical division, it was set up to utilise the waste generated by production of soda ash & salt. In FY07, TCL earned revenue of Rs 1.9 bn from sale of 512k mt of cement. With increasing demand, TCL has been operating at more than rated capacity.

Industrial salt 8.5 Source: Indiastats & PINC Research

Branded 1.0

Due to increase in production capacity of soda ash and salt, the cement capacity will also be ramped up in FY08 from the current capacity of 440k mtpa to ~800k mtpa.

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BUSINESS SEGMENTS

Cement Sales (mn mt) & Realisation (Rs/mt) Realisation/ mt 3,396 0.6 0.5

2,500

2,419 0.3 FY09E

FY08E

Source: PINC Research

Consumption of Fertiliser in India (mn mt)

Economies of scale due to increased capacity utilisation will further improve TCL's profitability. The fertiliser segment contributes ~59% to revenues and ~40% to profitability. In FY07, TCL earned a revenues of Rs 8.6 bn from sale of ~1 mn mt of urea, which accounted for more than 4% of domestic demand. The urea division contributed ~33% to the fertiliser division revenue and ~21% to the total revenues.

Urea Sales & Realisation (Rs/mt)

1.1

Source:PINC Research

9,000 8,834

8,500 8,000 7,500

FY09E

7,000 FY08E

FY03 0.9

1.0

0.8

FY05

7,181 FY04 0.9

0.9

8,661

1.0

7,601

7,679

FY06

1.0

1.0

8,491

1.1

8,628

FY07

1.2

Realisation/mt

1.0

Urea sales (quantity -mn mt)

NPK

Urea

32.0 24.0

6.0

16.0

3.0

8.0

0.0

0.0 FY09E

9.0

FY08E

To benefit from the new urea policy which allows the manufacturers to keep gains from production above 110% capacity , TCL is undertaking de-bottlenecking measures at Babrala, which will increase the capacity to ~1.2 mn mtpa by Q4FY09. Babrala boasts the reputation of being the most energy efficient plant in the country.

DAP

12.0

FY07E

TCL manufactures urea and complex fertilizers at its Babrala (capacity-865k mtpa) and Haldia plant (capacity of ~800k mtpa) respectively. Both the plants at Babrala and Haldia operated at more than full capacity in FY07.

FY06

Fertiliser- ‘In policy shackles’

FY05

FY07

FY06

FY05

FY04

FY03

2,000

FY04

0.5

3,000

FY03

2,409

3,500

FY02

2,251

2,908 0.5

0.4

0.5

0.4

0.5

0.6 0.5

4,000

3,773

FY01

3,773

FY00

Cement (quantity -mn mt) 0.7

Industry Scenario Increasing demand for food grains, improving irrigation facilities and growing agri-business focus is driving demand for fertilisers. Demand for urea grew by ~2.5% CAGR to ~24 mn mt since FY2000 while demand for DAP and NPK fertiliser grew by ~5% CAGR over the same period to 15 mn mt. However, due to shortage of raw materials and an unfavourable fertiliser policy, no new capacity has been added since FY99. As a result, ~4.7 mn mt of urea and ~4 mn mt of complex fertilisers & DAP were imported in FY07 at a cost of Rs 15k/mt whereas the domestic cost is ~Rs9k/mt.

Source: Crisinfac & PINC Research

As per the latest urea policy, manufacturers are not required to share the profits if they manufacture fertilisers beyond 110% of capacity. This is expected to act as an incentive to the industry to increase production vis-a-vis importing the same. Under provisioning of subsidies The subsidy bill has increased substantially due to increase in raw material prices, increased fertiliser consumption, increase of costlier imports without corresponding increase in endgate prices. In FY07, due to under-provisioning of subsidy, there was a substantial delay in disbursal of subsidies, thereby impacting profitability of the sector. As a result, many manufacturers have consistently curtailed production to avoid a bloated receivables situation and extended working capital cycles. To add to the existing woes, only Rs 220 bn was budgeted as subsidy in the budget for FY08 against requirement of ~Rs 420 bn (Source-Fertiliser Association of India). Further, Rs 115 bn of subsidies that are pending for FY07 which will have to be paid from the budgeted amount.

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BUSINESS SEGMENTS Issue of Fertiliser bonds & additional provisioning In Aug’07, the government of India has propose to issue fertiliser bonds of Rs 75 bn. The bonds will be freely tradeable in the market. It has further provided for Rs 75 bn for the subsidy (net cash outgo-Rs 65 bn and 10 bn from recoveries of crop husbandry). This is likely to improve the profitability of manufacturers as they will have lower liquidity crunch and lesser interest cost. Due to lower working capital requirement, the production of fertiliser is also likely to increase. However the subsidy bill is still under-budgeted (expected subsidy is ~500 bn while only 370 bn has been budgeted including the proposal) and the issuance of bonds has just postponed the immediate concern. The concern of ballooning subsidy bill still looms large, the bonds will be accounted as off balance sheet contingent liabilities, hence the fiscal deficit and the borrowings are artificially suppressed. Sustaining on imported fertiliser is not feasible in the long run as it is substantially costlier than domestically manufactured fertilisers. Being the third largest consumer of fertilisers globally, any increase in imports will lead to a sharp appreciation in global prices, making imports even more expensive. Raw material a critical issue Sourcing and the cost of the raw material has been a constant concern to the industry and the government. Naphtha, natural gas & fuel oil are being used interchangeably as feedstock for manufacturing of ammonia which is in turn used for manufacturing urea. Fertiliser industry, specially the nitrogenous is very energy intensive. Energy sources are used as feedstock and also for power & fuel requirements.

Feedstock-Wise Share for Nitrogenous Fertiliser Fuel Oil & others 9% Mixed feedstock 10%

Natural gas 41%

Outsourced 14%

Naphtha 26%

Of the total domestic nitrogenous capacity, 86% has captive ammonia production while 14% is outsourced. Of the entire capacity of ~20 mn mtpa, 41% is based on natural gas, 26% on naphtha, 10% on mixed fixed stock while 9% uses fuel oil and other feedstocks. The raw materials are subsidised by the government at specific prices fixed by the government. Prices of naphtha has been inflationary (currently~$16/mt) and is more than 2 times costlier than gas (~$6/mmbtu), causing the subsidy bill of the government to balloon. To reduce the cost of production and contain the subsidy bill, the government is encouraging the manufacturers to replace naphtha by natural gas. However, the amount of gas being produced in the country presently is insufficient to meet the entire demand from the industry. The additional gas being produced is used for power generation. Further, all the manufacturers are not located in the vicinity of the gas supplying pipelines. The government policy is not conducive either for transforming the plant from naphtha to gas as the capital charges are not subsidised by the government. Complex Fertilisers Phosphatic fertilisers have various combinations which uses phosphoric acid, natural gas , rock potash and sulphur as raw materials. Phosphoric acid is the key raw material, which is scarce leading to firming up of prices. While the distribution of phosphatic fertiliser is deregulated, the prices of these are regulated. To ensure uninterrupted supply, TCL entered in a JV with IMACID, a manufacturer of phosphoric acid. The JV ensures a constant supply of phosphoric acid at a price that is fixed annually. While phosphatic fertiliser prices are also regulated to a certain extent, the distribution of these fertilisers is deregulated. The import price of phosphoric acid have been fixed at ~$566/mt (vs. $461/mt in FY07). TCL sold ~750k mt of phosphatic fertiliser, which constituted ~5% of domestic demand and earned revenue of Rs 15.6 bn (inclusive of Rs ~4 bn revenue from trading of complex fertilisers). To utilise its huge network of Tata Kisan Sansar and cater to the growing demand of fertiliser, TCL also trades in complex fertiliser which added Rs ~4 bn to its revenue. The complex fertiliser segment contributed ~60% to revenues of fertiliser division and 38% to total standalone revenues in FY07.

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N E W I N I T I AT I V E S International Business

To meet the growing demand and to maintain its leadership position, TCL will have to augment its capacity and explore new markets.

IMACID- ‘A strategic JV’ For assured supply of phosphoric acid, TCL entered into a 33% strategic joint venture named Indo Maroc Phosphore S.A. (IMACID), Morocco with Office Chérifien des Phosphates, Morocco, (OCP) and Chambal Fertiliser & Chemicals Ltd. TCL acquired 16.6% stake each from the previous two joint venture partners for a consideration of Rs 1.7 bn. TCL has entered into a volume contract with IMACID to meet its phosphoric acid requirements for manufacturing complex fertilizers. IMACID was promoted in 1997 as a 50:50 JV between Office Chérifien des Phosphates, Morocco, (OCP) a state-owned company incorporated in the Kingdom of Morocco and Chambal Fertilisers and Chemicals Ltd.

Soda ash also has been classified as a star because TCL is the market leader in this segment and the industry is expected to grow at a rate of more than 5%. Considerable amount of capex has been planned for the division for capacity expansion. Further consolidation of its position in the market will be an uphill task, the sustained demand in the domestic industry will help the division generate profits. Fertiliser business has been classified as a question mark due to its low national market share and a moderate growth of the industry. The fertiliser policy and mounting subsidy arrears are not conducive for the growth of the industry.

In FY07, TCL’s share of IMACID's revenue stood at Rs 2.7 bn with an operating profit of Rs 580 mn and a net profit of Rs 240 mn. It supplied 145k mt of phosphoric acid to TCL for the year.

Regulation of urea sales and high freight cost prevent the companies from increasing their market share . Hence, the fertiliser sector will continue to be in the question mark category. However, it has been generating substantial cash for the organisation.

Product Matrix

New Initiatives

TCL’s various business segments can be plotted in the BCG matrix given the growth rate of the respective industries and the market share of TCL. The salt business is classified as a star since TCL is the market leader in the branded segment and the industry is expected to witness a higher growth rate . The salt industry is likely to grow at ~4% but due to increased health consciousness and organised retailing the branded segment is expected to grow at a higher rate.

Strengthening its core competency in manufacturing of soda ash, TCL plans to set up a natural soda ash producing unit in Tanzania.

Product Portfolio Stars High

Soda Ash

Question marks Fertiliser

Salt Business Growth Rate

Low Cash Cow

Dogs

High

Low Relative Position (Market Share)

Source: PINC Research

It is also leveraging its distribution network of Tata kisan Sansar for procurement of fresh produce. TCL is also diversifying in producing bio-fuels, an industry which is in nascent stage in India. Soda ash- ‘Expanding in Tanzania’ TCL plans to set up a soda ash plant near Lake Natron in Tanzania and has signed an MOU with Govt. of Tanzania for the same. Lake Natron is a source for natural soda ash and a feasibility study has been undertaken to ensure viability of the project. Results of the study are due to be declared in Q2FY07 and if found feasible, the project will have a gestation period of ~3 years. Also, any work in and around the area will require environmental clearance from the government as it is a protected area and a tourist attraction. While salinity of the water is lower than that at Lake Magadi, the larger size of the lake will help extract higher volumes.

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N E W I N I T I AT I V E S 'Khet Se' - Joint venture with 'Total Produce' TCL has entered in a 50:50 joint venture with 'Total Produce' of Ireland for distribution of fresh fruits and vegetables across India. The JV has been named as 'Khet Se'. The JV plans to consolidate the supply chain from producer-to-end consumer by directly sourcing from farmers and supplying to wholesalers and retailers. Consolidation of supply chain will help increase efficiency, improve the shelf life of products and reduce product losses. TCL has more than 600 centers of Tata Kisan Sansar, which have established relationships with farmers through selling of agri-inputs and advising on crop patterns and soil testing. These centers will be utilized for sourcing the produce. Total Produce is Europe's largest fresh produce provider with a presence across farming, packaging and distribution. It has an annual turnover of ~Euro 2 bn and has operations throughout Europe. TCL will be able to leverage Total Produce’s expertise in sourcing, packaging and supply chain management. TCL plans to open two centers in Kolkata and Ludhiana in FY08 and then plans to set up 40 centers pan-India at a capex of Rs 560 mn. Rapid urbanization and increase in organized retail will provide impetus to the fresh produce business. Efficient supply chain management and better market reach will further add value. Bio-fuel- ‘A new story’ With depletion of fossil fuel reserves globally, bio-fuels are an emerging opportunity. TCL has taken the initiative for manufacturing of bio-diesel. It has set up an innovation centre in Pune where 20 scientists are developing products and processes via application of bio and nanotechnology. It is setting up a bio-ethanol plant in Parbhani, Maharashtra with an initial capacity of 30 kiloliters/ day. It is likely to start construction of the plant in FY08, which is scheduled to be commissioned in FY09. Capacity will be scaled upto 100 kiloliters/day over the next few years. The plant will use sweet sorghum as the feedstock. Though it is not cultivated in volume in the region, TCL will leverage its reach with farmers and expertise in contract farming for cultivation of the crop.

Most of the developed countries have initiated manufacturing bio-fuels due to scarcity of fossil fuels and environmental concerns. To promote the same, various countries are subsidizing and providing incentives for setting up bio-fuel units. TCL is an early mover in the industry in India. Increasing awareness about benefits of bio-fuel and growth of the industry will provide a big fillip to the performance of TCL. Financial Performance In Q1FY08, TCL reported 11% fall in sales to ~Rs 6.7 bn owing to fall in revenue from both fertilisers and inorganic chemicals. Revenue from inorganic chemicals and fertiliser both witnessed a fall by~5.3% to Rs 3.5 bn and by 17.3% to Rs 3.2 bn respectively. Sale of urea declined by 2.4% to ~200k mt while sales of phosphatic fertiliser fell sharply by 44% to 61k mt. Soda ash sales declined by 9.2% to 164k mt while salt sales increased by 5.4% to 118k mt. Cost of raw materials (as a % of net sales) declined by 350 bps to 29% due to liquidation of old inventory. Due to lower trading activities, cost of traded goods declined by 32% to Rs 323 mn. Power & fuel and freight & forwarding charges declined by 18% and 6% respectively to Rs 739 mn and 621 mn due to lower production and sales. Liquidation of old inventory and more than proportionate decline in expenses pushed up the OPM, which increased by 340 bps to 24.4%. However, due to lower volumes, operating profit increased by a paltry 3% to Rs 1.6 bn. Other income increased by 124% to Rs 121 mn, depreciation was flat at 367 mn while net interest expenses declined by 61% to Rs 3 mn.

Sales & Production Volumes (Standalone) Sales (mt) Urea Soda ash Salt Phopshatic fertilisers

Q1FY08

Q1FY07

200,244 164,155 118,200 61,257

205,207 180,786 112,150 109,475

Production (mt) Urea Soda ash Salt Phopshatic fertilisers

Q1FY08

Q1FY07

216,947 170,754 116,615 143,572

246,855 188,536 112,553 202,231

Source: Company

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FINANCIAL PERFORMANCE TCL incurred translation gains of Rs 378 mn (vs a loss of Rs 162 mn in Q1FY07) due to appreciation of rupee. The extraordinary gains pushed up the net profits, which grew by 61% to Rs 1.2 bn. Its 100% subsidiary, BMG posted sales of Rs 4.3 bn, operating profits of Rs 680 mn (OPM of 15.9%) and net profit of Rs 160 mn in. BMG accounted for interest and depreciation expenses of the expanded capacity at Magadi, which impacted overall profitability. IMACID, its 33% JV, reported sales of 690 mn, operating profit of Rs 200 mn (OPM of 29%) net profit of Rs 110 mn. Consolidated net sales of TCL were Rs 11.3 bn with operating profit of Rs 2.5 bn and net profit of Rs 1.4 bn. In FY07, TCL reported 14% increase in sales to ~Rs 40 bn. Revenue from inorganic chemicals and fertiliser both grew by~13.5% to Rs 15 bn and Rs 24.9 bn respectively. Sale of urea increased by 7% to ~1 mn mt while sales of phosphatic fertiliser increased by 7% to 710k mt. Soda ash sales were up by 2% to 721k mt while salt sales increased by 3% to 475k mt. Cement division clocked a volume of 512k mt in FY07. Cost of raw materials increased by 24% to 16 bn due to firm raw material prices . Due to increase in import price of fertilisers, TCL scaled down its trading activities. As a result, cost of traded goods declined by 15% to Rs 3.9 bn. Power & fuel and freight & forwarding charges increased by 22% each to Rs 3.9 bn and 2.7 bn respectively as a result of higher freight costs. Inspite of rising costs, OPM increased by 34 bps to 17.2% due to reduction of trading component, which earn lower margins. Consequently, operating profit increased by 18% to Rs 6.9 bn.

Sales & Production Volumes (Standalone) Sales (mt) Urea Soda ash Salt Phopshatic fertilisers

FY07

FY06

1,017,000 721,947 475,000 710,000

954,000 707,000 461,000 662,000

Production (mt) Urea Soda ash Salt Phopshatic fertilisers

FY07

FY06

1,011,000 757,000 443,000 759,000

960,000 738,000 436,000 687,000

FY07 Revenue Break-Up (Standalone-Rs 40 bn) Phosphatics Fertilisers 38%

STPP 4% Others 5%

Cement 5%

Soda Ash 18% Urea 21%

Salt 8%

Source: Company

Other income increased by 63% to Rs 943 mn due to maiden dividend received from Tata Industries, while depreciation increased by 8% to Rs1.5 bn. The interest expenses were Rs 48 mn in FY07 against a net interest gain of Rs 148 mn in FY06 owing to an interest on refund of taxes Rs 255 mn. The appreciating rupee benefited TCL on account of translation gains on FCCBs issued in FY05. This resulted in an extraordinary gain of Rs 80 mn as against a loss of Rs 161 mn in FY06. TCL had raised a 5-year zero-coupon FCCB of $150 mn in FY05 convertible into equity @ Rs 230.78/share at a fixed exchange rate of Rs 43.65/$. The extraordinary gain negated the impact of rise in net interest expenses and consequently, net profits grew by 26% to Rs 4.4 bn. Consolidated net sales of TCL were Rs 59.7 bn with operating profit of Rs 10 bn and net profit of Rs 5.1 bn. Subsidiaries’ performance Its 100% subsidiary, BMG posted sales of Rs 16.5 bn, operating profits of Rs 2.6 bn (OPM of 15.9%) and net profit of Rs 630 mn in FY07. In H2FY07, BMG accounted for interest and depreciation expenses of the expanded capacity at Magadi, which impacted overall profitability for the fiscal. IMACID, its 33% JV, reported sales of 2.7 bn and net profit of Rs 240 mn in FY07. Capex TCL intends to invest Rs 4.5 bn over next 3 years in India. At Mithapur, Rs 2.5 bn will be invested in increasing soda ash capacity to 1.2 mn mt, cement by 100% to 1 mn mt as well as its salt capacity. TCL has

Source: Company

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OUR VIEW

Financial Performance

(Rs mn)

Sales

Operating profit

Du-Pont Analysis Net Profit

80,000

9,000

60,000

7,000

40,000

5,000

20,000

3,000

0

1,000

NPM (%) Asset Turnover (x) Asset/Equity (x) ROE (%)

FY05

FY06

11.3 0.8 1.8 17.0

10.6 1.0 1.9 20.3

FY07 FY08E FY09E 8.7 1.3 1.9 21.2

9.3 1.3 1.6 19.6

9.8 1.3 1.4 18.6

Source: PINC Research

FY09E

FY08E

FY07

PE Band

FY06

Median PE v/s Daily PE

FY05

Outlook We expect consolidated net sales to grow by 12% to Rs 65 bn in FY08 and by 12% in FY09 to Rs 73 bn due to contribution from additional capacity at Magadi and Mithapur. OPM is expected to be in range of 17%-17.5%. TCL should be able to post an operating profit of Rs 11 bn in FY08 and Rs 13 bn in FY09. We expect net profits to grow by 19% to Rs 6.1 bn in FY08 and by 18% to Rs 7.2 bn in FY09.

TCL is a cash rich company with cash and equivalents of Rs 5.6 bn at end-Mar’07. It has further investments of Rs 1.4 bn on its books, the market value of which is currently Rs. 13.5 bn. At CMP of Rs 245, TCL is trading at a P/E of 8.3x, EV/ Sales of 0.9x and EV/EBIDT of 4.7x discounting its FY09E consolidated estimates. We believe that post Magadi expansion, BMG should be able to generate higher OPM. With its expansions underway, TCL should deliver a superior performance over the next few years. Hence, we reiterate our ‘BUY’ recommendation with a price target of Rs 320 on a one year investment horizon. Concerns: 1. Adequate availability of gas at feasible prices is crucial for optimal performance of the urea business and shortage of the same will impact profitability. 2. The chemicals business has high sensitivity to movement in prices of phosphorus, coke and sodium compounds. Thus, any appreciation of prices beyond government recommended levels will force the company to absorb the higher costs as the same will not be reimbursed in the form of subsidy. 3. Mounting subsidy arrears and consequent stretching of working capital cycle will impact financing costs.

Source: PINC Research

initiated debottlenecking for its urea capacity at Babrala at a cost of ~ 1.5 bn, which is expected to be completed in 18 months. TCL will invest ~Rs 500 mn in its phosphatic fertiliser plant for debottlenecking. Globally, TCL plans to grow inorganically in its fertilisers business. It plans acquisitions/greenfield capacities in locations with availability of cheaper gas. The Tanzania project is currently undergoing feasibility studies. The company has investments worth Rs 13.5 bn and huge cash reserves, we expect TCL to acquire companies globally also for production of natural soda ash.

Daily PE

Median PE

500

20

15x

375

15

12x

250

10 5

125

0

0

9x 6x

Apr-07

Apr-06

Apr-05

Apr-04

Apr-03

Apr-07

Apr-06

Apr-05

Apr-04

Apr-03

3x

14

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TATA CHEMICALS LTD.

R E S U LT S T A B L E

Financial Results for the quarter ended Jun’30, 2007 Particulars (Rs Mn)

Quarter Ended 30/06/07

30/06/06

Year Ended % chg.

31/03/07

31/03/06

% chg.

Net Sales

6,689

7,547

(11.4)

58,096

40,290

20.00

Total Expenditure

5,057

5,961

(15.2)

48,030

32,930

45.9

(1,304)

(1,716)

-

215

(1,014)

-

3,245

4,169

(20.9)

19,320

14,660

31.8

(Inc)/dec in stock in trade Consumption of raw material Staff cost

388

342

13.5

3,480

4,619

(24.6)

Cost of traded goods

323

474

(31.9)

4,071

1,489

173.5

Stores, Spare Parts & Consumed

413

429

(3.8)

2,445

2,056

18.9

Power and Fuel

739

897

(17.6)

7,640

4,223

80.9

Freight & Forwarding Charges

621

659

(5.8)

4,603

3,112

47.9

633

707

(10.4)

6,256

3,785

65.3

1,632

1,586

2.9

10,067

7,360

36.8

121

54

124.3

943

818

15.3

1,753

1,640

6.9

11,009

8,178

32.9

Other expenditure Operating profit Other Income PBDIT Interest Depreciation PBT & extra-ordinary items Provision for current tax Provision for deferred tax Fringe benefits

3

8

(61.0)

909

284

220.1

367

365

0.6

2,739

1,840

48.8

1,383

1,267

9.1

7,361

6,053

21.6

540

341

-

2,350

1,972

-

-

-

-

51

(304)

-

10

10

-

-

55

-

Extraordinary items

(379)

162

-

(120)

47

-

Net Profit

1,212

754

60.8

5,080

4,283

18.6

Equity Capital (F.V. Rs 10)

2,152

2,152

-

2,152

2,152

-

Diluted equity

2,435

2,435

-

2,435

2,435

-

-

-

-

23,567

20,042

-

Reserves (excl. rev. res.) Basic EPS (Rs)

5.6

3.5

60.8

23.6

19.9

18.6

Diluted EPS (Rs)

5.0

3.1

-

20.9

17.8

-

-

-

-

119.5

103.1

-

OPM (%)

24.4

21.0

-

16.9

17.7

-

NPM (%)

18.1

10.0

-

8.7

10.6

-

Book Value (Rs)

Expenditure (% of Net Sales) Raw materials (incl. stock adj.)

29.0

32.5

-

33.6

33.9

-

Staff cost

5.8

4.5

-

6.0

11.5

-

Cost of traded goods

4.8

6.3

-

7.0

3.7

-

Stores, Spare Parts & Consumed Power and Fuel

6.2

5.7

-

4.2

5.1

-

11.0

11.9

-

13.1

10.5

-

Freight & Forwarding Charges

9.3

8.7

-

7.9

7.7

-

Other expenses

9.5

9.4

-

10.8

9.4

-

15

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TATA CHEMICALS LTD.

SEGMENTWISE ANALYSIS

Segmentwise results for the quarter ended Jun’30, 2007 (Standalone) Particulars (Rs Mn)

Quarter Ended 30/06/07

30/06/06

Year Ended % chg.

31/03/07

31/03/06

% chg.

Segment Revenue Inorganic Chemicals

3,532

3,729

(5.3)

15,041

13,266

13.4

Fertilisers

3,157

3,818

(17.3)

24,869

21,909

13.5

Total

6,689

7,547

(11.4)

39,910

35,175

13.5

Net Sales

6,689

7,547

(11.4)

39,910

35,175

13.5

Inorganic Chemicals

914

913

-

3,651

3,214

13.6

Fertilisers

529

516

2.6

2,434

2,007

21.3

Total PBIT

1,443

1,429

1.0

6,085

5,220

16.6

Less: Interest

(376)

170

-

3

269

(99.0)

PBIT

Less: Other Unallocable

57

155

(62.9)

(256)

(158)

62.3

1,761

1,105

59.4

6,338

5,109

24.1

8,428

8,126

3.7

9,268

9,192

0.8

Fertilisers

12,591

13,461

(6.5)

14,413

14,617

(1.4)

Total

21,019

21,587

-

23,681

23,810

-

Inorganic Chemicals

43.4

45.0

39.4

35.0

Fertilisers

16.8

15.3

16.9

13.7

Total

27.5

26.5

25.7

21.9

25.9

24.5

24.3

24.2

16.8

13.5

9.8

9.2

21.6

18.9

15.2

14.8

Chemicals

52.8

49.4

37.7

37.7

Bulk Fertilisers

47.2

50.6

62.3

62.3

Chemicals

63.3

63.9

60.0

61.6

Bulk Fertilizers

36.7

36.1

40.0

38.4

PBT

Capital Employed Inorganic Chemicals

ROCE (%)

PBIT Marg (%) Inorganic Chemicals Fertilisers Total

Sales Mix (%)

PBIT Mix (%)

16

29

TATA CHEMICALS LTD.

F I N A N C I A L S TAT E M E N T S

Year Ended March (Figures in Rs Mn) Income Statement

2006

2007

2008E

2009E

Cash Flow Statement

2006

2007

2008E

2009E

Revenues

40,344

58,096

65,406

73,053

PBT & Extraord. items

6,246

7,400

8,682

10,570

Growth (%)

34.1

44.0

12.6

11.7

Depreciation

1,840

2,739

2,901

3,253

Interest & dividend inc.

(536)

(920)

(1,193)

(1,559)

312

944

781

627

Total Expenditure

32,779

47,991

54,234

60,162

Operating Profit

7,565

10,105

11,172

12,890

46.7

33.6

10.6

15.4

Interest & dividend income

1,003

996

1,193

1,559

EBIDT

8,568

11,101

12,365

14,449

Growth (%)

(-) Interest

Interest paid Misc Exp W/off

(219)

(480)

-

-

Tax paid

(875)

(2,144)

(2,605)

(3,382)

(5,121)

1,612

(5,154)

(4,991)

(Inc/Dec in working capital Cash from operations

1,648

9,151

3,414

4,516

Net capital expenditure

(1,893)

(5,204)

(2,500)

(2,500)

Net investments (incl sub.)

(5,887)

(2,255)

-

-

703

923

1,193

1,559

(7,077)

(6,536)

(1,307)

(941)

482

962

781

627

(-) Depreciation

1,840

2,739

2,901

3,253

PBT & extraordinary items

6,246

7,400

8,682

10,570

(-) Tax provision

1,668

2,350

2,605

3,382

Issue of eq. shares

-

-

-

-

Preference Shares Repaid

-

-

-

-

1,004

369

651

(100)

(1,589)

(1,716)

(2,204)

(2,547)

(557)

(953)

(781)

(627)

Net Profits

Interest & dividend recd Cash from inv. activities

4,523

4,999

6,078

7,188

Fully diluted Eq. sh. O/s (mn no)

215

215

244

244

Book Value (Rs)

103

120

149

168

Basic EPS (Rs)

19.9

23.6

28.2

33.4

Cash from fin. activities

(1,142)

(2,300)

(2,334)

(3,273)

Diluted EPS (Rs)

17.6

20.9

24.9

29.5

Inc/Dec. in cash

(6,571)

316

(228)

303

Balance Sheet

2006

2007

2008E

2009E

Key Ratios

2006

2007

2008E

2009E

Equity Share Capital

2,152

2,152

2,436

2,436

EBIDT (%)

21.2

19.1

18.9

19.8

Reserves & Surplus

20,042

23,567

33,849

38,490

ROACE (%)

18.0

20.0

20.0

21.6

Net worth

22,194

25,718

36,285

40,927

ROANW (%)

20.3

21.2

19.6

18.6

Total Debt

18,277

18,642

12,600

12,500

Sales/Total Assets (x)

0.9

1.3

0.0

0.0

3,230

2,912

2,912

2,912

Debt:Equity (x)

0.8

0.7

0.3

0.3

239

211

211

211

Current Ratio (x)

1.2

1.0

1.3

1.6

Capital Employed

43,939

47,484

52,008

56,550

Debtors (days)

66.1

58.3

68.4

74.9

Fixed Assets

27,794

30,561

30,159

29,407

Inventory (days)

76.7

47.6

46.0

43.4

Net current assets

2,588

926

5,851

11,146

Net working capital (days)

22.3

5.6

32.2

54.9

Investments

5,475

7,753

7,753

7,753

EV/Sales (x)

1.6

1.1

1.0

0.9

936

576

576

576

EV/EBIDT (x)

7.7

6.0

5.5

4.7

70

37

37

37

P/E (x)

12.3

11.7

9.8

8.3

43,939

47,484

52,008

56,550

P/BV (x)

2.4

2.1

1.6

1.5

Deferred Tax liability Deferred Capital Grants

Deferred Tax Assets Misc exp. Total Assets

Change in debt Dividend paid Interest paid

17

30

Team Equity Desk R. Baskar Babu

- Head - Equity Broking

[email protected]

91-22-66186465

Sachin Kasera

- Co-Head - Domestic Equities

[email protected]

91-22-66186464

Sameer Ranade

- Capital Goods / Utilities

[email protected]

91-22-66186381

Ajit Dange

- Banking / Financial Services

[email protected]

91-22-66186377

Sujit Jain

- Real Estate / Construction

[email protected]

91-22-66186379

Amol Rao

- Hospitality / Pipes / Packaging

[email protected]

91-22-66186378

Nirav Shah

- Sugar / Textiles

[email protected]

91-22-66186383

Nakul Dharmawat

- Cement / Building Products

[email protected]

91-22-66186382

Rishabh Bagaria

- Auto / Auto Ancilliary

[email protected]

91-22-66186391

Ruchir Desai

- Technology

[email protected]

91-22-66186372

Syed Sagheer

- Logistics / Light Engineering

[email protected]

91-22-66186390

Chandana Jha

- Banking / Financial Services

[email protected]

91-22-66186398

Rahhul Aggarwal

- Metals

[email protected]

91-22-66186388

Dipti Solanki

- Media

[email protected]

91-22-66186392

Faisal Memon

- Associate - Metals

[email protected]

91-22-66186389

Ashish Dangi

- Associate - Lifestyle / Retail Products

[email protected]

91-22-66186481

Ashwani Agarwalla

- Associate - Agro Products / Fertilizers

[email protected]

91-22-66186482

Janakiram Karra / Chandrakant / Rajesh Khanna / Raju

[email protected]

91-22-66186326

Shivkumar / Manoj Parmar / Pratiksha / Prajapati

[email protected]

91-22-66186323

Research

Institutional Dealing & Sales:

Derivative Desk Sailav Kaji

- Head - Derivative

[email protected]

91-22-66186344

Anand Kuchelan

- Sr. Analyst

[email protected]

91-22-66186344

Shailesh Kadam

- Sr. Analyst

[email protected]

91-22-66186349

Gaurang Gandhi

[email protected]

91-22-66186400

Hemang Gandhi

[email protected]

91-22-66186400

Ketan Gandhi

[email protected]

91-22-66186400

[email protected]

91-22-66186400

Directors

Rakesh Bhatia

- Head Compliance

18

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Infinity.com Financial Securities Ltd SMALL WORLD, INFINITE OPPORTUNITIES

Member : Bombay Stock Exchange & National Stock Exchange of India Ltd. Sebi Reg No: INB 010989331. Clearing No : 211

1216, Maker Chambers V, Nariman Point, Mumbai - 400 021 Tel.: 91-22-66186633/6400

Fax : 91-22-22049195

Disclaimer: This document has been prepared by the Research Desk of M/s Infinity.com Financial Securities Ltd. (PINC) and is meant for use of the recipient only and is not for public circulation. 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 its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors The information contained herein is obtained and collated from sources believed reliable and PINC has not independently verified all the information given in this document. Accordingly, no representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The opinion expressed or estimates made are as per the best judgement as applicable at that point of time and PINC reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval PINC, its affiliates, their directors, employees and their dependant family members may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the document This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of PINC. The views expressed are those of analyst and the PINC may or may not subscribe to all the views expressed therein This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. Neither this document nor any copy of it may be taken or transmitted into the United State (to U.S.Persons), Canada, or Japan or distributed, directly or indirectly, in the United States or Canada or distributed or redistributed in Japan or to any resident thereof. The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions Neither PINC, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Copyright in this document vests exclusively with PINC and this document is not to be reported or circulated or copied or made available to others.

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