Tata Chemicals (TTCH) has acquired the remaining 25% stake in TATA Chemicals Soda Ash Partners Holdings (TCSAP) from the Andover Group for $195 m (thus, valuing 100% stake at $780 m) through its wholly-owned subsidiary Valley Holdings. With this acquisition, TTCH has increased its ownership in TCSAP to 100%, which is a move to simplify enterprise architecture. For FY19, TCSAP had a turnover of $466 m and EBITDA of $101m. Thus, the deal is valued at 7.7x FY19 EV/EBITDA. Back in January 2008, TTCH had acquired 75% stake in TCSAP for $1 b (`40.4 b), which was funded by utilising $155 m of internal accruals, ECBs of $475 m and US borrowings of $350 m secured by way of non-recourse debt on the assets of the acquired company.
TTCH currently operates a capacity of 2.5MMT of natural soda ash in North America. The world’s largest deposits of trona —used for manufacturing natural soda ash — are found in the Green River Basin of Wyoming, North America. Production cost of natural soda ash is 25-30% lower compared to that of soda ash manufactured through Hou or Solvay process. TTCH acquired the balance 25% stake in TCSAP for $195 million; of this, $175 m will be funded through debt and balance will be funded internally.
We estimate a 5% increase in PAT for FY21 after factoring in 5.5% interest cost and the reduced minority interest pertaining to the North American operations. In 2016, the company sold off its fertilizer business. In 2019, it carved out a plan to demerge its consumer business with a clear strategy to focus on basic and the specialty chemicals business.
Additionally, TTCH is incurring capex of Rs 24 billion at its Mithapur plant for various categories, which is expected to come on stream by FY22 (in a phased manner).
The cash-cow business (soda ash and sodium bicarbonate) of TTCH is expected to remain steady due to potential balanced demand-supply scenario; the cash generated from the same would be partially deployed toward its specialty chemicals segment, which is high margin and return accretive. Our SOTP-based target price of `811 implies an upside of 25%. Maintain ‘buy’.
