UBS puts 'buy' on Tata Chemicals

RESEARCH: UBS

RATING: BUY

CMP: Rs 395

UBS maintains `Buy’ rating on Tata Chemicals (TTCH) with a new price target of Rs 500. TTCH is a leading player in various agriculture-related areas such as fertilisers and pesticides. TTCH is focused on driving future revenue and profit growth from segments related to farmers and agriculture, such as the Swach brand of water purifiers, customised/specialty fertilisers, etc. with production capacities in the US, the UK, Africa, and India.

UBS expects the soda ash capacity to generate healthy cash flows and help TTCH reduce the debt on its balance sheet. Additionally, we argue that soda ash fundamentals are at a trough and will improve from here. The average soda ash FOB (free on board) China price was 13% higher in Q1FY11 than in FY10. The stock is trading at an attractive 16% cash flow yield. UBS raises the FY11/FY12 EPS estimates by 49%/34% from Rs24.6/29.9 to Rs36.6/40.2. Meaningful changes in volume, price and margin outlooks for the soda ash and urea businesses have driven the price target and earnings estimate revisions.