Why Tata Chemicals Share Price is Rising

Whether markets are in the bull or bear phase, one name that has always been in the limelight is Tata Group, delivering remarkable returns.

Time and again, the Tata Group has been a treasure trove for investors. The stellar track record of Tata Group tells us a story of commitment to innovation and diversification over its 155-year journey.

This can be evident from the recent rally in Tata Motors.

On 5 March 2024, Tata Motors achieved a significant milestone by surpassing the Rs 1,000 mark for the first time.

This surge was propelled by a pivotal decision from Tata Motors' board, greenlighting a demerger plan to bifurcate the company into two distinct entities on 4 March 2024.

With just one day gap, another Tata Group stock has grabbed the headlines, rallying 13% in just one day.

This time, the spotlight was on Tata Chemicals, the conglomerate's chemical arm. Continuing its momentum, the stock surged an additional 14% today, reaching its 52-week high.

Before getting into details about the rally, here's a brief introduction to Tata Chemicals.

About Tata Chemicals

Tata Chemicals is a global company with business interests in basic chemistry products and speciality chemistry products.

The story of the company is about harnessing the fruits of science for goals beyond business.

The company's basic chemistry product range provides key ingredients to some of the world's largest glass manufacturers, detergents, and other industrial products.

Tata Chemicals currently is the world's third-largest producer of soda ash, with manufacturing facilities in Asia, Europe, Africa, and North America.

The company has a strong position in the crop protection business through its subsidiary company, Rallis India.

In the past five days, the shares of the company have jumped over 40%, hitting its lifetime high.

Why Tata Chemicals Share Price is Rising

# Talks of Potential Tata Sons IPO

Tata Sons is the investment holding company of the Tata Group.

The Tata Group comprises over 100 operating companies in seven business sectors: communications and information technology (IT), engineering, materials, services, energy, consumer products, and chemicals.

The company has been classified as an upper-layer non-banking financial company (NBFC), supporting and promoting other Tata Group businesses. It is currently preparing for its initial public offering (IPO).

According to the Reserve Bank of India's rules, when a company is designated as an upper-layer NBFC, it must go public within three years.

On 14 September 2023, the RBI announced that 15 financial firms, including Tata Sons, fall into this upper-layer NBFC category.

According to projections, Tata Sons is set to enter the public market by September 2025.

Size and the total IPO size are still speculations and not confirmed but reports state it might be the biggest IPO in Indian history.

That's right, Tata Sons IPO might surpass LIC's IPO size.

As the buzz over the potential listing of Tata Sons, the holding company of the Rs 30 trillion (tn) conglomerate, grows louder, investors have already started betting on Tata Chemicals, which could be the biggest beneficiary of the mega IPO.

Here's why...

Four Tata Group companies - Tata Motors, Tata Chemicals, Tata Power, and Indian Hotels - have ownership in Tata Sons.

However, the only realistic way to get exposure to this potential value-unlocking opportunity is via Tata Chemicals.

What Makes Tata Chemicals the Major Beneficiary in this Scenario?

Tata Sons is majorly owned by Dorabji Tata Trust (28%) and Ratan Tata Trust (24%). Both Tata Motors and Tata Chemicals own about 3% stake in the holding company, while Tata Power owns 2% and Indian Hotels 1%.

While Tata Sons is the promoter of Tata Chemicals and holds a 31.9% stake in the company, Tata Chemicals also holds more than 10,000 shares of Tata Sons, data from its annual report showed.

Tata Sons' ownership in Tata Chemicals amounts to nearly 80% of the company's overall market capitalisation, while for the other three companies, that figure lies between 16-21%.

Tata Chemicals was the top underperformer in the first two months of 2024, declining 7% and 9%, respectively, owing to the commodity nature of Soda Ash and industry-wide headwinds faced due to falling realisations.

According to calculations, Tata Sons could be valued at somewhere around Rs 8 trillion (tn) to Rs 11 tn. Assuming a holding company discount of around 60%, the value is likely to be Rs 6.4 tn.

This implies that the 3% stake held by Tata Chemicals would be around Rs 198.5 bn, which is as much as two-thirds of Tata Chemicals' market capitalisation of Rs 300.2 bn as of Wednesday's close.

The stock rallied another 10% today to hit its highest ever levels.

Even if the value of the shares of Tata Sons held by Tata Chemicals is discounted by about 30%, it would be close to Rs 140 bn.

A Look at the Financials

The revenues of Tata Chemicals grew at a CAGR of 10.2% from Rs 103.4 bn in FY19 to Rs 167.9 bn in FY2. During the same period, the net profit expanded at a much sharper rate of 16.1%.

The bottom line growing at a faster rate than the top line hits at the inherent operating leverage in the manufacturing business model.

Furthermore, during the study period, the global chemical industry underwent a structural change when the supply of chemicals from China decreased.

The Chinese government came hard on its chemical producers in order to control pollution. This impacted the global supply increasing the prices. At the same time, the Covid-19 pandemic played its due role in disrupting the global supply chains.

As a result, corporations adopted the China+1 strategy and started sourcing natural products from other countries.

Thus, these two factors aided the company to post higher margins.

Tata Chemicals Financial Snapshot (2019-23)

Particulars	31-Mar-19	31-Mar-20	31-Mar-21	31-Mar-22	31-Mar-23
Revenues (Rs in bn)	103.4	103.6	102	126.2	167.9
Revenue Growth (%)	-	0.2	-1.5	23.7	33
EBITDA Margin (%)	17	19	15	18	23
Net Profit (Rs in bn)	11.6	10.3	4.4	14	24.5
Net Profit Margin (%)	11	10	4	11	15

Data Source: Company's Red Herring Prospectus (RHP)

The company's consolidated revenue in the December 2023 quarter fell more than 10% to Rs 37.3 bn on a YoY basis. While its net profit dropped sharply by over 60% Rs 1.6 bn on a year-on-year (YoY) basis amid tepid market demand across key regions and segments.

In its filing, Tata Chemicals noted that its performance for the current period falls short in comparison to the performance of the previous year. This is attributed to pricing pressures experienced across all regions and reduced volumes.

The filing specified that, particularly in the United States, volumes witnessed an 80,000 MT decline due to a combination of plant shutdown and a shortage of rail cars. This resulted in a reduced absorption of fixed costs and an increase in fixed costs for the quarter.

What Next?

The demand environment for soda ash in domestic markets as well as international markets was challenging during the past quarter. This was especially so in the container glass and flat glass sectors in Europe & Americas, which led to pressure on volumes and prices.

According to the company's management, in the short term, the current demand-supply situation is likely to persist but should improve and stabilise over the long term, driven by growth sectors based on sustainability trends.

Tata Chemicals is the world's third-largest soda ash producer. Its soda ash capacity in the US and Kenya (64% of total capacity) benefits from natural trona deposits, which require low conversion costs.

TCL's capacity in Gujarat, India (24% of total) costs one of the lowest among synthetic soda ash producers, aided by proximity to limestone quarries, economies of scale, and an integrated cement plant utilising waste generated from soda-ash manufacturing.

These underpin the company's cost competitiveness relative to peers.

Demand in Europe (particularly the glass segment) has been weaker than expected in the financial year ending March 2024 (FY24), leading Turkish soda ash exports to pivot to Asia, resulting in industry oversupply pressuring the company's EBITDA margins.

The street expects industry conditions to start rebalancing from FY26, as improving market growth spurs demand for sustainable end-use industries like lithium processing and solar panels aid growth, and producers rationalise capacity amid cost and sustainability pressures.

It expects low-single-digit percentage growth in industry demand to balance supply additions over the long term.

Conclusion

The Tata Group boasts a strong track record of success across various sectors, suggesting potential for future growth.

Looking back at its most recent IPO, launched after nineteenin November 2023, Tata Technologies made a spectacular debut at astaggering 168% surge on its listing day.

This remarkable feat marked the most impressive listing since November 2021 for an IPO exceeding Rs 5 bn.

With the street expecting such a blockbuster listing of Tata Sons, Tata Chemicals is also set to benefit.

Going forward, the management has earmarked capital expenditure of Rs 20 bn in the long term during the FY24-27 period towards capacity building.

Overall, as per the planned expansion, the volumes of soda ash, bicarbonate, and silica are estimated to rise by 30%, 40%, and 400%, respectively, over and above the present capex plans.

Along with all this, the company's listed subsidiary, Rallis India, is focusing on manufacturing and growing its product portfolio to fill gaps to drive higher sales in the future.

Although the Tata Group companies have always remained at the forefront of innovation and the India growth story, it does not mean Tata stocks aren't vulnerable to macroeconomic conditions.

You should treat them like any other company when considering them from an investment perspective.

Remember, a fundamentally strong company has the potential to give good returns in the long run. Hence, it is better to carry out proper due diligence before investing in any stocks, including Tata Group companies.

As you're interested in Tata group stocks, check out the new section in our Stock Screener, where you can view the fundamentals of companies within a business group in one screen, including the Top Tata group stocks.

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