Tata Chemicals’ stock is up c16% from its recent low in February 2016 and we believe the market continues to see value. In our view, growing profit contribution of TTCH’s consumer segment is slowly but surely catching investor attention (we expect consumer segment PAT to contribute 38-40% to consolidated PAT in FY17e). However, the larger stock price decline over the past three quarters has in our view been led by TTCH’s inability to reduce its debt levels due to INR depreciation (impact of foreign debt) and TTCH pumping in funds into fertilizer segment working capital. We see both these at peak levels now (debt and working capital requirement) and this, coupled with much better cash flow generation starting Q4FY16/Q1FY17, should see this current period as the start of net debt levels reducing. We believe that initially a TTCH re-rating will be driven by balance sheet focus and then later by substantially increasing investor focus on consumer profits. Over the next two years, we expect the balance sheet to be in better shape in terms of debt levels (collective FCF of cRs 18 billion over FY17e and FY18e) and the market to assign higher valuation multiples to the consumer business profits starting FY18.
While I-Shakti salt volumes have struggled, we estimate Tata Salt volume growth has been close to double digit. Retain ‘buy’ with Rs 423 TP. We value TTCH on a sum-of-the-parts basis.
