BackFertilizer, US businesses upset Tata Chemicals June quarter
Improvement in fertilizer business and global soda ash prices will play a determining role on the stock performance in the coming quarters
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Shares of Tata Chemicals Ltd fell 1.55% on BSE on Wednesday after the company reported a performance that missed Street estimates on various counts. Consolidated sales increased 6%, slower than the Bloomberg consensus estimate of 8%. Revenues were weighed down by the weak US and fertilizer businesses.
Production and sales volume at the US subsidiary fell, as the manufacturing facility faced outages. Due to production losses, the company was not able to fully recover overhead expenses, resulting in a 7.5% drop in the subsidiary’s operating profit. The production losses come at inopportune time, since the facility was sold out or booked for the whole of 2015 on improving demand.
In India, the fertilizer business was hit by high input costs and the delay in implementation of the new urea policy. Due to the delay, the company was not able to avail of benefits of production beyond the cut-off level. As a result, operating profit of the fertilizer business slumped 45%. The business otherwise was also weak. The company switched from DAP (diammonium phosphate) production to complex fertilizer (NPK) manufacturing. With the season for complex fertilizers actually falling in the second and third quarters of the fiscal year, the switch resulted in a pile-up of inventories.
This weighed on consolidated performance. Against the expectation of a 12% rise in Ebitda, operating profit fell 4%. Net profit dropped 13% against a forecast 26% rise.
The company expects the fertilizer off-take to pick up as the season progresses. With the production problems being addressed, the US business is expected to stabilize in the next month or so. The management’s comments are reassuring. But the slowdown in China and the resultant drop in commodity prices have made the management cautious about the soda ash business, the company’s largest industrial products business. Prices, for now, are stable. But the management fears the slowdown in China may weigh on demand from user industries, which could crimp prices.
Even after the fall on Wednesday, the stock is still up 15% from the beginning of July. The stock gained on reports that the company is looking to sell its fertilizer business.
The sale can help Tata Chemicals deleverage and exit the low margin fertilizer business. Even as it is yet to clinch a deal, improvement in fertilizer business and global soda ash prices will play a determining role on the stock performance in the coming quarters.
The writer does not own shares in the above-mentioned companies.
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