Trading revenue and inventory gains drive the quarter: Tata Chemicals reported strong Q1 numbers helped by a jump in trading revenue (up 4x) and inventory gains. While revenue was up 6%, Ebitda (earnings before interest, taxes, depreciation and amortisation) margin was up 108 bps led by inventory gains of Rs 450 m. Adjusting for inventory gains, the operating performance was flat. We believe that higher margins reported in Q1 are not sustainable and maintain our annual estimates despite strong results. Retain Underperform on the stock. Stock trades at 11xFY12e PE (price-to-earnings) ratio for ~12% EPS CAGR (earnings per share, compound annual growth rate).
Fertiliser operations scale back to normal; trading helps: As per the company, while urea plant operated below capacity at 80% due technical problems, utilisation is likely to be normal, going ahead. Non-urea plant at Haldea worked at full capacity after the settlement of labour unrest. Trading revenue, up 4x YoY (year-on-year), was the main revenue driver in fertilisers. Also the company reported of resignation of the head of fertilisers division.
Expect margin pressure in soda ash to continue: While GCIP?s (the US company it acquired in 2008) capacity is sold out, the company mentioned that margins will be pressured, going forward, due to the inability to pass on the cost increases. Pricing is under pressure in Europe, too. We believe recovery in the soda ash market is unlikely in FY11, given the supply overhang in global markets and expect muted performance to continue.
Post 4 billion preference equity infusion in the company and repayment of ?79 m debt, the company?s leverage has improved to 0.7x from 0.96x. With a Rs 10 bn loan repayment scheduled in 2012 and planned capex of over Rs 40 bn over the next three years, we expect dilution ahead. Reiterate Underperform on unfavuorable risk reward.