Tata Chemicals: Divestment done, now new business development challenge awaits
Tata Chemicals’s divestment of the fertiliser business, while improving earnings quality, will also reduce the revenue base
Divestments and deleveraging have done wonders for the Tata Chemicals Ltd stock. The shares which were languishing till two years ago gained 49% last year as the company exited its less remunerative fertilizer business, pared debt (see chart) and sought to reinvent itself by developing new business segments. But as investors look forward, the key question they have to ponder over is when earnings momentum will return to the company, which is crucial for the next leg-up in the stock price.
The divestment of the fertilizer business, while improving earnings quality, will also reduce the revenue base. For perspective, Tata Chemicals derived Rs860 crore from the fertilizer business, constituting about one-third of the stand-alone entity’s revenues in the first half of the current fiscal year.
While Tata Chemicals is developing new businesses, these ventures are yet to contribute meaningfully to earnings. The two approved projects—nutraceuticals and silica—are in the planning and construction phase. The consumer products division, which is the pulses business, is yet to begin making profits. The firm expects this division to achieve or move towards break-even in the current year. But as the management pointed out in the last conference call with analysts, the division will continue to see new investments such as launch of new product categories.
So in essence, as an analyst with a domestic broking firm points out, Tata Chemicals will largely be comprised of the commodity soda ash business (from the earnings contribution perspective). Fortunately, the market is in a good shape.
Zarir Langrana, president (global chemicals business) at Tata Chemicals, says the soda ash market is balanced and expects prices to remain firm on the healthy demand growth in core developing markets.
“While Chinese prices have marginally corrected downwards from an abnormally high level witnessed since September onwards, they are still substantially higher than prices ruling in the first half of 2017. Chinese demand in the period Jan-Oct 2017 grew by 9%, against flat to negative demand growth in the two prior years,” he says. “Turkey is the only country that has and is adding capacity in a phased manner over the next few months but this is being balanced by rationalization and reduced production in other regions (notably China).”
Further, Langrana clarifies that the unusual winter conditions in the US did not impact its production facility in the country, indicating normal business conditions. While these comments and the good soda ash market conditions should hold investors in good stead, success of the new business ventures will be crucial for the long-term earnings growth trajectory.
Editor's Picks »
- Why Indian paint makers are shifting to water-based paints
- 2019 elections still some time away but defence stocks get the jitters
- Complan and Horlicks sale signals low energy in health drinks market
- With fall of the last dove, MPC minutes portend more than one RBI rate hike
- RITES IPO ticks the valuations box, but not the growth one