Tata Chemicals: Restructuring efforts yielding results; debt reduction may trigger re-rating

Tata Chemicals surprised the street with its consolidated results for the first quarter (Q1) of financial year 2014-15 (FY15). Its consolidated net profit after minority interest for Q1 FY15 was Rs 176 crore, significantly more than the Rs 75 crore it reported for Q1 FY14 and the consensus analyst estimate of Rs 96 crore.

In addition to the lower base effect, the 133% year-on-year jump in net profit was triggered by better performance by its domestic operations. Tata Chemical had reported a consolidated net loss of Rs 1,226 crore for Q4 FY14 due to the booking of restructuring costs. This had forced it to report a consolidated net loss of Rs 1,032 crore for the financial year.

On the back of improved margins in the fertilizer and chemical businesses, the standalone company reported better-than-expected net profit of Rs 170 crore in Q1.
It may maintain the margin in the coming quarters as well because of the firm soda ash prices prevailing in the country. Decrease in interest expenses on a quarter-on-quarter basis also helped it to achieve higher profit.

However, its domestic fertilizer business faces uncertainty due to delayed subsidy payments. With no clarity yet on the fertilizer subsidy policy from the new government, it plans to raise the share of the “non-subsidised” agriculture input business from the current one-third to half in two years. Since domestic gas prices are at high levels, Tata Chemicals may also not increase fertilizer capacity.

Though it is not generating big profits, the restructuring efforts in its foreign plants have started yielding results. Since a significant part of the restructuring costs at its UK and Kenya plants have already been booked in FY14, they are expected to breakeven in FY15. Though the volume from the US soda ash business came down during the last quarter, it is expected to pickup. The operating margin should also improve as the contracts get re-negotiated at higher prices.

After the successful restructuring exercise, the company management is now focusing on reducing debt. Due to improvement in operational environment and fall in interest costs, analysts are increasing the consensus EPS estimate for FY15 and FY16.

Increased free cash flow from operations and reduction in debt should help the company get better ratings. Growth in the consumer business is another factor that can spark a re-rating in the counter.

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