Africa investment may be positive in long run for Tata Chemicals

Africa investment may be positive in long run for Tata Chemicals

Tata Chemicals Ltdannounced on Monday after market hours that it will invest in a new port-based ammonia-urea fertilizer manufacturing plant in Gabon, Africa. The project includes setting up a 1.3 million tonnes per annum urea plant (stream 1), with an option to expand into another stream of equal capacity (stream 2).

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Tata Chemicals will invest $290 million (Rs 1,290 crore) to purchase a 25.1% stake in stream 1. As much as 62.9% stake in stream 1 will be held by Singapore-based OlamInternational Ltd and the remaining by Gabon.

Execution work has already started on stream 1 and it is expected to be commissioned in three years. On the other hand, the time schedule for executing stream 2 would be mutually decided among Tata Chemicals, Olam and Gabon over the next two years. Tata Chemicals’ stake in stream 2 is expected to be substantially higher.

So, what does this development mean for the company? In a presentation, Tata Chemicals has highlighted that it is expecting an annual earnings before interest, taxes, depreciation and amortization of $300-350 million per stream.

Though it’ll be a while before this reflects in Tata Chemicals’ numbers, it would be nonetheless positive. The deal would also give the company some fiscal benefits. There is also an assured supply of low-cost natural gas feedstock for both the streams.

Tata Chemicals would be able to leverage on Olam’s strong network in Africa and the facility would give it good proximity to end-markets. On the other hand, Tata Chemicals would offer project management consultancy, and operations and maintenance service post the commissioning of the project.

But investors don’t seem to be very thrilled. Tata Chemicals’ stock rose by 2% on Wednesday to 362 apiece on a day when the bellwether Sensex of the Bombay Stock Exchange also increased by 2%. One reason could be because the benefits of this investment would take some time.

This development improves sentiments in the short run for the stock. Analysts had downgraded the earnings estimates of Tata Chemicals for the current fiscal and the next after the company announced weak results for the December quarter, when numbers were affected due to input cost pressures and plant shutdowns.

Graphic by Sandeep Bhatnagar/Mint

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