Tata Chemicals’ outlook is subdued after a dull June quarter


Tata Chemicals Ltd is expected to face tough times ahead even as the June quarter (Q1FY24) performance was nothing to write home about. The problem: Excess availability of soda ash, a key revenue contributor for the company. In the earnings call, Tata Chemicals management said capacity from Inner Mongolia, China came into the market a few months earlier than expected.

Additional supply is expected to come into the market. Inner Mongolia is seen averaging output of 3 million tonnes by next year. Out of this, 50% capacity has come onstream and is earlier than expected. Various leading producers too are expected to add capacity.

Along with this, in Q1, slower growth in the Chinese economy post-covid and softening of industrial production in developed economies has weighed on soda ash prices. This was across geographies, including India, the US, and Kenya where Tata Chemicals operates.

The management stated that due to excess inventories in the market, there is some delay in soda ash purchase decisions among its customers. The company said the supply overhang now stands at about 2.0-2.5 million tonnes. Accordingly, it expects the balancing of demand-supply and rationalization of capacity could take 12-18 months.

Against this backdrop, Tata Chemicals’ consolidated revenue growth stood at just 6% year-on-year in Q1 to 4,218 crore. This is the slowest growth seen in the past nine quarters, at least. In Q1, growth was led by better price realization, altho-ugh this was offset by weak volumes across markets, including the US and India. Muted revenue growth and a sharp rise in other expenses took a toll on the Ebitda margin, which fell by 70 basis points to 24.7%.

Tata Chemicals shares are down 2.8% in the past two trading days since Q1 results. While it is positive that the company’s capital expenditure plans are on track, weak outlook on soda ash prices may exert pressure on near-term profit margin.

Meanwhile, the stock trades about 17% below its 52-week high, and any potential upside on the stock is capped until demand recovers. Kotak Institutional Equities has cut FY24-25 earnings per share estimates by 8-13%.

“Our earnings cuts are driven primarily by lower margin assumptions across geographies, as we expect soda ash prices to weaken further,” they said in a report dated 9 August. A large portion of capacity additions may pay off only after FY2025-26, according to Kotak.

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Updated: 09 Aug 2023, 11:02 PM IST

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