The "Chemical" Explosion - Tata Chem in Growth Mode

The Tata Group India’s largest private sector conglomerate, is making its presence felt across the globe. After having taken Czech tea company JEMCA and UK's biggest steelmaker Corus under its wings last year, Tata Motors is close to signing an agreement with Ford to buy Jaguar and Land Rover. Meanwhile, Tata Chemicals has entered into a definitive deal to acquire General Chemical Industrial Products. India’s leading manufacturer of inorganic chemicals, fertilisers and food additives has agreed to buy the US-based soda ash producer for $1 billion (about Rs4,000 crore). The acquisition would be made through a combination of equity and debt.

Harbinger Capital Partners has a majority stake in General Chemical, which has a capacity of 2.5 million tonne per annum. The deal is still pending stockholder and regulatory approvals. With this acquisition, Tata Chemicals would strengthen its position to take advantage of tight capacity in the global soda ash markets, where spot prices remain around $300 per tonne. The company, which already has a 30% share in the domestic soda ash market, said in a statement, “The merger will provide Tata Chemicals with access to markets in North America, Latin America and the Far East, which complement its existing markets.”

 

Angel Broking, which has a buy recommendation for Tata Chemicals, said in a research note in late November, “We believe, going ahead, a favourable business environment and capacity additions will sustain the company’s earnings momentum.” Referring to the company’s buying spree, analyst Rohit Nagraj commented, “They may seem to be growing fast but then India is a growing story and if you have the financial muscle, why not?” “As a conglomerate they have been able to integrate the acquisitions well,” Nagraj added. It’s quite commendable that the group has been able to squeeze out synergies with the global companies it has been acquiring. The latest purchase would add significant global scale and offer cost advantages.

 

Tata Chemicals reported a profit after tax (PAT) of Rs125.48 crore for the fiscal third quarter, up 7.45% year-over-year. Net PAT plummeted almost 42% to Rs91 crore in the three months ended December 31, 2007. While operational efficiencies helped the bottom line, the company benefited from robust demand for soda ash. Company MD Homi Khusrokhan said, “During the quarter we have also prepaid our high cost debt and borrowed at much lower levels.” Tata Chemicals, which has the lion’s share in the domestic edible salt market, plans to launch new products.

 

In an exclusive interview with CNBC-TV18 earlier this month, Sharekhan AVP Hemang Jani said, “They (prices of soda ash) have gone up by about 60%... Due to this, Tata Chemicals would be able to report a very good growth over the next 1-2 years.” “We have set a price target of about Rs535 for Tata Chemicals,” Jani added.

 

The shares were on an upward trend since mid-May, crossing Rs430 in the early part of January. Since then, the share price has been under pressure. I believe the downturn represents a good time to buy shares if you are an investor with a long-term horizon.

 

 

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