The stock trades at a rich price to equity valuation of 38.9 times FY22 earnings estimates and 22.1 times FY23 earnings estimates
Tata Chemicals Ltd has given stellar returns to investors. The stock's price is up 2.7 times during the last six months. Robust demand, following rebound in economic activities post easing of nationwide lockdown, lifted prices of speciality chemicals sharply, thus boosting investor confidence in Tata Chemicals.
The company’s focus on growing chemical business, after having demerged the consumer vertical, also kept investor expectations high. The Street remains optimistic on the lithium battery business plan of Tata Chemicals that can add to earnings, starting FY23, even though concrete business plans are awaited. Soda ash, sodium bicarbonate and edible salts volumes continued to improve steadily.
However, while the domestic business performance has remained robust, international business has remained a mixed bag. Further, with valuations turning pricey, analysts have now started sending words of caution to investors.
The stock trades at a rich price to equity valuation of 38.9 times FY22 earnings estimates and 22.1 times FY23 earnings estimates. This, as per analysts at Nirmal Bang Institutional Equities, factors in improving fundamentals over FY21E-23. They said their FY23 EBITDA estimate is the highest in 15 years. The stock’s valuation thereby looks stretched. This premium is likely due to bullish expectations on EV battery business pending clarity and chemical earnings, they added.
The fresh wave of covid cases in Europe is a cause of concern. Analysts expect the US, and European markets to take time to recover from the covid impact and hence do not see chemicals sales growth picking up as fast as the Street is anticipating.
Nirmal Bang has trimmed the company's basic chemical segment volume in soda ash by 3.8%, 0.8% and 3.0% for FY21, FY22 and FY23 respectively. The FY15-21 average volumes stood at 3.72 million tonne per annum and was at highs of 3.858 million in FY18, analysts’ data suggest.
Analysts also said global soda ash companies Ciner and Genesis are cautiously optimistic about the revival of soda ash demand by the end of calendar year 2021. The Street may also remain watchful on operating margins in the near term. There could be a lag in passing on the increase in freight and energy costs which can keep tab on margins during HFY22.