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Is Tata Chemical A Good Buy Post Correction?

Is Tata Chemical a good buy post correction?

Tata Chemicals

Tata Chemicals is a global chemicals company.  For the common man, Tata chemicals is just Tata salt an Tata Sampann but the company has a well diversified portfolio dealing in basic chemistry products (62% of revenue), consumer products (15% of revenue) and specialty products (23% of revenue).

 

Since the past couple of years, the company is focused on their basic chemistry products and specialty chemicals business. Back in 2016, it sold off its fertilizer business which resulted in better operating margins from 14% to 20% in FY17. In May 2019, the management decided to demerge the consumer business of Tata Chemical and merge it with Tata Global Beverages however it has retained the salt manufacturing facility.

Post the demerger, the company is focusing on increasing revenue contribution from Specialty chemicals from 23% at present to 50% in the future. Specialty chemicals business enjoys higher margins and is return accretive.

 

In FY19, Revenue grew 10% YoY. EBITDA margin contracted 280bp YoY to 18.5% and EBITDA declined 4% YoY mainly due to the muted performance in Europe. Pat declined by 49% yoy and consequently, the return ratios were impacted.

In Q2FY20, The top line increased by 4% yoy mainly driven by growth in the specialty chemicals business (- higher volumes & better realization) and consumer products while the bottom line increased by 10% yoy. EBITDA increased by 5% yoy while Margins have improved from 20% to 21% despite higher raw material costs aided by better operational performance across geographies. The company has hiked prices in US & Africa which will boost revenue in Q4FY20 since Us operates under annual contracts.

 

Basic Chemicals: Soda Ash is the main cash cow for the business. Globally, it is the 3rd largest Soda ash producer. Going Forward, The Company is foraying into segments that use this soda ash as a raw material. In order to tap new customer segments and expand global operations, the company will undertake a capex of 2400 crores for debottlenecking and capacity expansion in the Soda Bi-carbonate and soda ash business.

Specialty Business

With the aim to increase revenue contribution from this segment, they have recently forayed into neutraceuticals (nutrition business) and High dispersible silica (HDS) segments. The combined capex 565 crores and commercial production is expected in 2HFY20. They have also begun the commercial recovery of cathode active materials from spent lithium-ion cells/batteries on a pilot basis. Rallis is the key contributor to TCL’s specialty chemical segment.

 

Going forward, once the additional capacity comes into play and commercial production begins in the specialy chemical segment, margins are expected to improve even further. Higher RoCE in the nutritional business will boost the overall return ratios for the company.  At present, RoE and RoCe is around 8% and 10% rescpectively.  Management expects the soda ash business will remain favorable on the back of steady demand and supply situation however, domestic soda ash volumes will take cues from the recovery in auto and construction sector.

Technical View

The stock is in a strong uptrend where the two previous corrections have been only 38.2% of the major swing. The current correction in the counter has been  38.2% from a higher swing at 171.50 and that is further indicating  that the counter is in a strong uptrend. The 549 levels where the correction halted also happens to be the Fibonacci confluence zone and hence a strong support.  At the support zone the RSI taking support over the bull zone of 40 is yet another indication that the bull trend is intact. The stock has been consolidating between 549 and 640 levels for the past nine months now. The breakout from  the zone is an indication that  the bulls have taken charge  and the uptrend has resumed.  The stock has  minor resistance at 665 and 693 and post  that the counter will retest the highs at 782 levels. the break of the 784 levels will take the counter to 962 levels which is the 61.8% of the Fibonacci extension and  hence the first major resistance for the counter post the breakout. Considering the nine months of consolidation and a breakout the counter should move up sharply in the weeks to come. One can buy at current levels of 662  as well as on pull backs to 640 levels.

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