MOSL: TATA CHEMICALS (INITIATING COVERAGE)-Flight of rebirth-Transforming into a growth company-re-rating imminent

Tata Chemicals (initiating coverage): Flight of rebirth; Transforming into a growth company; re-rating imminent

(TTCH IN, Mkt Cap USD2.7b, INR692, TP INR940, 36% Upside, Buy)

Tata Chemicals (TTCH) is a 78-year-old commodities company, reinventing itself as a specialty and consumer products company. It has a diversified portfolio of businesses: (a) soda ash and sodium bicarbonate, where it enjoys global leadership, (b) fertilizers, which it is exiting from, (c) agricultural inputs, through subsidiary, Rallis India, (d) consumer products such as branded iodized salt, pulses and spices, and (e) a fledging specialty products business – materials such as highly dispersible silica (HDS) and nanomaterial, and nutritional products like oligosaccharides and polyols. It also has sizable financial investments that it can liquidate to fund its growth.

•  TTCH is using its cash cows - soda ash and sodium bicarbonate - to build growth businesses such as consumer and specialty products. In the consumer business, it enjoys leadership in the domestic table salts market and is fortifying its pulses and spices portfolios. In the specialty products business, it is developing nanomaterial and nutritional solutions.
• Massive cash generation of INR39.7b via divestment of the urea and phosphatic fertilizers business and sale of investments coupled with steady accruals from the soda ash business would help TTCH repay debt. Its interest outgo is likely to decline from INR4.1b in FY17 to INR2.1b in FY20.
• As TTCH scales up its growth businesses and deleverages its balance sheet, we expect its consolidated RoCE to improve considerably, in turn driving a stock re-rating. We believe it would be fair to assign ~30% premium to its five-year average EV/EBITDA of 7.5x. Our SOTP-based target price of INR940 (implied EV/EBITDA of 9.7x FY20E) implies 36% upside. We initiate coverage with Buy.