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MOSL: TATA CHEMICALS (Buy)-Pressured by high costs and one-offs-But price hikes and softening RM costs to drive revival

Tata Chemicals: Pressured by high costs and one-offs; But price hikes and softening RM costs to drive revival

(TTCH IN, Mkt Cap USD2.1b, CMP INR594, TP INR771, 30% Upside, Buy)

 

• A miss across the board: Revenue grew 10% YoY to INR28.3b (our estimate: INR29.4b) in 3QFY19. EBITDA declined 16.2% YoY to INR4,712m (our estimate: INR6,425m), with the margin down 522bp YoY to 16.6% (our estimate: 21.9%). Adj. PAT fell by 47.7% YoY to INR2,404m (our estimate: INR3,145m). For 9MFY19, revenue grew 11% YoY to INR85.6b (margin down 320bp YoY to 18.6%), while adj. PAT fell 12.8% YoY to INR7,761m.
• Profitability takes hit across most geographies: Operating performance was disappointing across geographies, barring Africa. In North America, EBITDA/mt declined 13% YoY to USD43, with utilization down to 91% (v/s 95% in 3QFY18), due to the impact from power outage (INR220m) and additional energy cost (+INR80m). In Europe, soda ash utilization declined to 81% from 88% in the year-ago period and EBTIDA/mt fell 75% YoY to GBP14 owing to higher energy costs. The margin in standalone business, too, contracted 300bp YoY to 22%. The only silver lining was Africa, where EBITDA/mt increased 31% YoY to USD52.
• Valuation and view: On account of a significant earnings miss of 24% in 3QFY19, we cut our earnings estimates for FY19/20/21 by 9%/13%/10%. We note that TTCH’s performance was dampened by multiple one-offs in recent quarters, but there have been signs of revival with the softening of natural gas prices (~15% average sequential decline in last four months) and an average price hike of USD5/mt for CY19. Firm coke prices, however, continue posing challenges for Europe and India. We value TTCH on an SOTP basis on FY21E with an implied EV/EBITDA of 8x (in-line with its five-year average EV/EBITDA). Our valuation is justified by business transformation toward high-RoCE segments (specialty and consumer products). Our TP of INR771 implies a 30% upside. Maintain Buy.