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Tata Chemicals + Zurai Industries – HDFC Sec

April 21, 2008

Tata Chemicals:TCL’s fertilizer business, which comprises urea (32% of fertilizer revenues) and complex fertilizers (68%), should benefit from favourable policy pronouncements. The latest $1 bn acquisition of a 100% stake in GCIP at 2.4x EV/Sales and 7.6x EV/Ebitda is definitely much more competitive than its earlier acquisition of Brunner Mond at similar valuations. Spot prices of Phosphoric acid are hovering around $1400/Mt against IMACID’s contracted price of $566/Mt, which are due for renewal later this month. The profits for IMACID to rise by 30% & 22% in FY09E and FY10E mainly led by firm prices and increase in capacity from 0.36 Mtpa to 0.45 Mtpa. Led by firm soda ash prices and repaying of high cost debt, we expect adjusted profits for BMGL to rise by 57% and 35% in FY09E and FY10E.

TCL being more leveraged to soda ash and given the firm outlook on soda ash prices over the next 2 years we expect it to benefit the most.On FY09E valuation TCL trades at 8.3x PER, 5.6x EV/Ebitda & 1.4x EV/Sales. HDFC maintains a BUY with a price target of Rs 444.

Zuari Industries Ltd:Zuari Industries Ltd (Zuari) is a major player in phosphatics fertilisers. We expect the fertiliser division’s operating margins to expand by about 90bps to 4.8% in FY09E. It has a number of investments in non-fertilizers business (about 7% of revenues), where the earnings are expected to grow by 74% during FY07-09E.

Paradeep Phosphate is expected to account for 35% of consolidated profits in FY08E. The accounts for PPL are closely held and we did not have access to their Q3FY08 numbers. (Stake holders: 20% Govt of India, 40% Zuari & 40% OCP, Morocco).

While the development on centre scrapping the SEZ proposal could be sentimentally negative, it doesn’t affect earnings estimate. An excellent 38% CAGR in profits, undemanding valuations at 3.1x FY09E and 0.4x EV/Sales FY09E. Buy with a target price of Rs 520.

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