Analysts have downgraded Tata Chemicals Ltd’s earnings estimates for the current fiscal and the next after the company announced weak financial results for the quarter ended December. What affected the numbers? Input cost pressures, a 35-day shutdown at the IMACID plant (a joint venture) and a 15-day plant shutdown at Brunner Mond (a subsidiary) on account of the severe winter in Europe.
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During the quarter, IMACID could not contribute any profit. “Revenues for Brunner Mond declined by 20% year-on-year (y-o-y) to Rs390 crore and due to drop in margins (driven by lower operating leverage and rising input cost like crude and coking coal), the subsidiary accounted for loss of Rs10 crore,” wrote analysts from Emkay Global Financial Services Ltd in their post-results note.
Tata Chemicals’ total consolidated operating revenue in the December quarter increased by 9% over the same period last year to Rs2,900 crore. Revenue from the inorganic chemicals business (mainly soda ash), which contributed 46% of the total gross revenue, fell by 4%. Remaining revenue came from the fertilizers and other agri inputs business, which posted decent revenue growth.
Higher raw material costs (mainly coke and coal), which were up by almost 30%, increased overall expenditure, resulting in a 575 basis points fall in the operating profit margin to 15.3%. Accordingly, operating profit slumped by 20% to Rs441 crore. Even as the company continues to be hit by input cost pressures, margins are expected to show some improvement in the current quarter.
That’s because Tata Chemicals has recently taken a soda ash price hike to pass on some of the cost pressure.
Profitability of both inorganic chemicals and fertilizers business was poor. Earnings before interest and tax (Ebit) fell by 25% and 36%, respectively, for inorganic chemicals and fertilizer business. Ebit margins, too,declined for both. Overall, net profit declined by 22.5% to about Rs165 crore.
The stock has declined by 20% since the company’s September results, to Rs342 per share. Current valuations are attractive, but investors need to watch out for the impact of input costs pressures and to what extent the price hikes would offer respite.
Investors should also watch out for margin pressure in the complex fertilizer segment in FY12 after the subsidy rates have been reduced under the nutrient-based subsidy policy.
Graphic by Ahmed Raza Khan/Mint
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