Why Tata Chemicals shares are up 10%?


Shares of Tata Chemicals Ltd jumped more than 10% in Monday’s morning trade on the National Stock Exchange. This is on a day when the benchmark Nifty50 index was 0.7% down.

What gives?

The reason is simple. The company announced results for the fourth quarter of FY22 (Q4FY22) on Friday after market hours and performance has exceeded Street expectations. Plus, management commentary has been upbeat.

Tata Chemicals’ portfolio covers basic chemistry and specialty products. The company’s consolidated Ebitda margin in Q4 stood at 18.9%, which is an expansion of 816 basis points (bps) on a year-on-year (y-o-y) basis. Ebitda is earnings before interest, tax, depreciation and amortization. One basis point is 0.01%. Sequentially, Ebitda margin expanded by 153bps.

Analysts had estimated a relatively lower Ebitda margin. For perspective: analysts at Motilal Oswal Financial Services and Kotak Institutional Equities were expecting the company’s Ebitda margin at 16.4% and 17.1, respectively.

“Earnings blew past estimates despite cost pressures, setting a new benchmark for forthcoming quarters. Q4FY22 was the first quarter following price resets in annual contracts in the US, and also reflected fuller benefits of price increases across quarterly/half-yearly price contracts prevalent in other market,” said analysts from Kotak in a report on 1 May.

Overall, Tata Chemicals’ Ebitda rose by a whopping 133% y-o-y to 657 crore. This is at a time when revenues have increased by 32% y-o-y to 3481 crore. In its investor presentation, the company said, input costs have gone up across units. Gas prices rose in Q4 and remain at elevated levels. Plus, coal and freight costs are higher vis-à-vis historical trends. As such, cost pressures are likely to stay from a near-term perspective.

Meanwhile, as mentioned earlier, management commentary has been positive. In a call, the management told analysts that demand for soda ash is expected to stay robust over the next 18 months. They added that there are no additional capacities coming in from China and that soda ash capacity of 1 million tn has been shut recently in the country.

Encouraged by the financials and commentary, analysts have upgraded their earnings estimates. “Factoring the strong operating performance in Q4FY22, we have raised our FY23/FY24 Ebitda estimate by 5% each,” said Motilal Oswal’s analysts in a report on 1 May.

Kotak has raised FY2023/24E earnings per share by 53%/65% to Rs66.7/Rs74.0, reflecting the rebasing of the quarterly earnings trajectory visible in Q4FY22. “We also revise our sum-of-the-parts valuation and arrive at a March 2023 fair value of Rs1,090,” pointed out the Kotak report. Motilal Oswal’s sum-of-the-parts based target price for Tata Chemicals’ stock is Rs1045 per share.

Currently, Tata Chemicals’ shares are trading at around 1030 apiece, suggesting investors are capturing a good share of the optimism.

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