Will soda ash prices bottom out? Tata Chemicals investors watch closely

The stock price had not corrected even after weak Q3FY24 results as investors hope soda ash prices are nearing the bottom. (Photo: Pixabay)
The stock price had not corrected even after weak Q3FY24 results as investors hope soda ash prices are nearing the bottom. (Photo: Pixabay)

Summary

Post FY24 results, most brokerage houses have kept their target price for Tata Chemicals at least 10% lower than the current market price

Tata Chemicals Ltd’s dismal performance in FY24 may keep the stock well below its lifetime high of 1,349 apiece seen on 7 March when there were reports on potential value unlocking of its 3% stake in Tata Sons.

Tata Chemicals' Ebitda per tonne for soda ash and related basic chemicals in India fell  30% year-on-year in FY24 and 10% for North America.

The company earned than 75% of last year’s Ebitda from its Indian and North American plants engaged in soda ash manufacturing. This excludes the Ebitda attributable to Rallis India, the company’s subsidiary with nearly 55% holding, as it is engaged in seeds and agrochemicals business and thus, valued separately.

The operations in the UK and Africa do not contribute anything substantial. In fact, Tata Chemicals has recognized a write-down of 963 crore for its UK operations owing to the erosion in value.

Adjusted for the value of Rallis’ stake, the enterprise value (EV) for Tata Chemicals, which is market capitalization plus net debt, comes to 30,000 crore. Based on FY24 Ebitda, the EV/Ebitda multiple comes to 12x.

For calculating the enterprise value, or EV, the market value of Tata Chemicals' holding in group companies, mainly Titan worth about 3,500 crore has not been considered as liquid investments as it seems more of a strategic nature.

Now, for all commodity companies, while deciding whether the valuation multiple is on the higher side or lower, it is crucial to determine at what stage of the cycle is the underlying commodity price in terms of peak or trough.

Also Read: Tata Steel: Riding India's infra wave, facing global commodity downturn

As such, buying at a high multiple at the trough of the cycle does not hurt as the margin of safety is high. But it is risky to buy at peak commodity prices even at a lower multiple as valuations can quickly expand later when price realization drops causing profit to collapse.

Soda ash prices are certainly not at their peak with imported soda ash prices plummeting to $219 per tonne last month from $373 in April 2023. So, any rebound in prices could bring down Tata Chemicals’ double-digit valuation multiple.

As volume is the only controllable variable for growth, the company is keen to continue expanding capacity. After the ongoing expansion of 185,000 tonnes comes on stream from Q2FY25 for Indian operations, Tata Chemicals is looking to grow capacity by another 30% with capex of 2,000 crore over FY25-FY28. North America will also see expansion of 4 lakh tonnes.

Also Read: Indian Oil Corp faces a slippery slope after weak Q4 results 

Post FY24 results, most brokerage houses have kept their target price for Tata Chemicals at least 10% lower than the current market price of 1,099. However, the stock price had not corrected even after weak Q3FY24 results as investors hope soda ash prices are nearing the bottom.

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