Inc

Table of Contents

Rpt. 12890544 27-Nov-2007

TATA CHEMICALS LTD - INITIATING COVERAGE ABN AMRO BANK - ATTAVAR, ABHIJIT

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Rpt. 12891621 21-Nov-2007

TATA CHEMICALS LTD - INITIATING COVERAGE ANGEL BROKING LIMITED - NAGRAJ, ROHIT

35 - 49

These reports were compiled using a product of Thomson Financial.

www.thomson.com/financial

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Produced by: ABN AMRO Asia Securities (Singapore) Pte Ltd
Tuesday 27 November 2007
Initiation of coverage

Tata Chemicals A value play on Indian agri sector
We believe the next leg of India's growth story lies in the rural and agricultural sector. We see Tata Chemicals as a play on this, it being India's leading fertiliser producer and an early mover in developing a distribution chain reaching out to India's farmers.

Buy
Absolute performance

n/a
Short term (0-60 days)

Neutral
Market relative to region Chemicals

India
Price

Key forecasts
FY06A Revenue (Rsm) EBITDA (Rsm) Reported net profit (Rsm) Normalised net profit (Rsm)¹ Normalised EPS (Rs) Dividend per share (Rs) Dividend yield (%) Normalised PE (x) EV/EBITDA (x) Price/book value (x) ROIC (%)
1. Post-goodwill amortisation and pre-exceptional items Accounting Standard: Local GAAP Source: Company data, ABN AMRO forecasts

Rs307.00
Target price

FY07A 58096.0 10066.5 5080.4 5045.6 20.7 9.36 3.05 14.8 8.47 2.91 12.9

FY08F 59941.5 10876.5 6674.8 5412.4 22.2 10.1 3.28 13.8 7.14 2.07 13.4

FY09F 65350.7 12662.5 7145.2 7145.2 29.4 11.8 3.83 10.4 5.96 1.84 15.3

FY10F 71930.5 14133.3 8284.6 8284.6 34.1 13.6 4.44 9.00 5.19 1.64 16.7

Rs450.00
Market capitalisation

40344.2 7518.2 4283.4 4257.8 17.5 7.98 2.60 17.6 11.3 3.38 18.6

Rs68.15bn (US$1.72bn)
Avg (12mth) daily turnover

Rs35.85m (US$0.88m)
Reuters Bloomberg

TTCH.BO

TTCH IN

year to Mar, fully diluted

Price performance (1M) Price (Rs) 321.0 -4.4 -4.4 6.1
Dec 05

(3M) (12M) 235.8 30.2 -2.4 26.6
Dec 06

227.1 35.2 -3.8 1.9

Forget the clutter; focus on the structural strengths TCL's business model has too many moving parts with a presence across diverse but not so glamorous sectors such as soda ash, branded edible salt and fertilisers. In our view, this is precisely the reason the stock has stayed below the radar of mainstream investors and trades at a significant discount to India's Sensex despite being the third-largest producer of soda ash in the world today and India's leading fertiliser producer and distributor, as well as having a strong management pedigree. A play on growth in India's agricultural sector Over 740m Indians live in villages and nearly 230m of those work in farming, which still contributes 20% of India's GDP. We believe the next leg of India's growth story will have to involve raising agricultural productivity and TCL is a play on this structural trend. TCL is not only one of the most energy-efficient urea manufacturers in India, but also has strong brands in phosphatic and complex fertilisers. Even more interesting are TCL's plans to reach out to over 2.5m farmers through its distribution network of Tata Kisan Sansars, a one-stop shop for farmers. TCL's investment portfolio has a lot of hidden value TCL holds strategic investments in other Tata group companies, which are carried at a historical cost of Rs2.8bn in its balance sheet. On our estimates, the current fair value of these investments is close to Rs47bn, ie, close to Rs200 per share or 65% of the stock's current market price. A value pick for the Indian markets TCL currently trades at FY09F P/E of 10.4x and P/B of 1.8x, a near 50% discount to the BSE Sensex, despite having a comparable FY09F ROE of 17.7% and FY07-09F EPS CAGR of 19% on our estimates. TCL's valuations look well-supported by its FY09F equity free cash flow yield of 6.7% and dividend yield of 3.8%. We value TCL's core business at Rs90bn using a three-stage DCF model and add the value of its investment portfolio at a 30% holding company discount to get a target price of Rs450 per share, implying upside of 47% from current levels.

Absolute % Rel market % Rel sector %
Nov 04 500 400 300 200 100 TTCH.BO

Sensex

Stock borrowing: Difficult Volatility (30-day): 32% Volatility (6-month trend): ↑ 52-week range: 340.00-187.05 Sensex: 19247.54 BBG AP Chemicals: 270.71
Source: ABN AMRO, Bloomberg

Analyst
Abhijit Attavar
Singapore +65 6518 7881 [email protected]

Important disclosures can be found in the Disclosures Appendix.
Priced at close of business 23 November 2007.

www.abnamroresearch.com

Permit No. MICA (P) 210/06/2007, Level 21, One Raffles Quay, South Tower, 048583, Singapore

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The Basics
Key assumptions
We forecast Tata Chemicals’ revenues for inorganic chemicals and fertilisers will achieve FY07-10 CAGRs of 6.3% and 8.7% pa respectively. We expect inorganic chemicals margins to dip from 16.9% in FY07 to 14.1% in FY08 due to temporary production problems at Mithapur before recovering to 17.5% in FY10. On fertilisers, we expect the margin recovery seen in 1H08 to continue. With the Babrala plant expansion due to come through by 2H09, we have projected fertiliser margins will reach around 15% for FY09 and FY10.
Versus consensus
Normalised profit (Rsm) FY08F FY09F FY10F ABN AMRO Cons % diff

5,412 5,689 -4.9% 7,145 6,847 8,285 N.A 4.4%

Source: Reuters, ABN AMRO forecasts

How we differ from consensus
We have tried to estimate the fair value of TCL’s investment portfolio. On our estimates, the portfolio is worth Rs47bn, ie, nearly Rs200 per share or about 66% of TCL’s current market price. We believe consensus may be failing to reflect the true value of TCL’s strategic investments.
Key events
Date Event

End Jan’08 3rd quarter Fy08 results

Valuation and target price
We value TCL’s core business at Rs90bn using a three-stage DCF model with WACC of 9.9%. This implies an FY08F EV/EBITDA of 7.1x for the core business which seems reasonable to us. We add to that our fair value for TCL’s investment portfolio at a 30% holding company discount. Using the fully-diluted equity base of 243m shares, we arrive at our target price of Rs450 per share.

Source: Company

Catalysts for share price performance
We believe TCL’s market price has not adequately reflected the value of the company’s investment portfolio. A gradual realisation of this value and any potential moves to unlock the value of some of the less strategic holdings like TCS could lead to a re-rating. Also, any positive changes in government fertiliser policy to incentivise private sector investments would improve sentiment for TCL.

Forced ranking*
Upside / Company Tata Chemicals Punj Lloyd Tata Steel Maruti Suzuki Thermax Rec Downside Buy Buy Buy Buy Buy 47% 29% 24% 9% -9%

Risks to central scenario
Any adverse changes in soda ash prices due to weakening of the commodity cycle could affect TCL’s inorganic chemical margins. Also, any adverse changes in India’s fertiliser policy that affect the returns of private-sector producers and distributors could affect TCL’s profitability. Finally, any further delay in paying the fertiliser subsidy to producers could impact TCL’s working capital requirements and increase its interest costs.

* by difference to target price as at time of publication. Recommendations may lie outside the structure outlined in the disclosure page Source: ABN AMRO forecasts

Volatility (30-day)
80 % 70 % 60 % 50 % 40 % 30 % 20 % 10 % Jan 03

Oct 03

Aug Jun Apr Feb 04 05 06 07

Nov 07

Source: Bloomberg

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Key assumptions and sensitivities
Table 1 : Key assumptions and projections
Rsm Turnover Inorganic chemicals Fertilisers Total sales Segmental profit Inorganic chemicals Fertilisers Total segment profit less allocated other income Total operating profit Operating margins Inorganic chemicals Fertilisers Blended margin Turnover Cost of sales Gross profit Depreciation and amortisation Employee cost Other operational expenses Total Operating expenses EBIT Non-operating income/ (expenses) - net Profit before EX items XO Items - (expenses)/income - net EBIT (after XO items) Finance expense Profit before taxation Taxation Profit after tax Working Capital (days of sales) Inventory Receivables Creditors Net working capital (days) Net debt/ (cash) (Rsm) net debt/ equity
Source: Company data, ABN AMRO forecasts

FY05A 11,353 18,728 30,081

FY06A 16,896 23,285 40,181

FY07A 31,513 26,583 58,096

FY08F 30,697 29,244 59,941

FY09F 33,767 31,584 65,351

FY10F 37,819 34,110 71,929

2,223 2,078 4,301 543 3,758

3,863 2,422 6,285 607 5,678

5,323 2,728 8,050 723 7,328

4,335 4,455 8,789 700 8,089

5,572 4,738 10,309 700 9,609

6,618 5,117 11,735 700 11,035

19.6% 11.1% 14.3% 30,081 -13,998 16,084 -1,377 -1,064 -9,864 -12,326 3,758 709 4,466 309 4,775 -246 4,529 -1,124 3,406

22.9% 10.4% 15.6% 40,344 -18,265 22,079 -1,840 -1,489 -13,026 -16,402 5,678 808 6,486 26 6,511 -505 6,007 -1,723 4,283

16.9% 10.3% 13.9% 58,096 -23,606 34,490 -2,739 -3,480 -20,904 -27,162 7,328 943 8,270 35 8,305 -824 7,481 -2,401 5,080

14.1% 15.2% 14.7% 59,941 -23,753 36,188 -3,053 -4,151 -21,161 -28,365 7,824 1,115 8,938 1,262 10,201 -998 9,203 -2,528 6,675

16.5% 15.0% 15.8% 65,351 -26,794 38,557 -3,053 -4,575 -21,320 -28,998 9,609 1,200 10,809 0 10,809 -885 9,924 -2,779 7,145

17.5% 15.0% 16.3% 71,929 -29,491 42,438 -3,097 -5,035 -23,271 -31,453 11,035 1,201 12,236 0 12,236 -734 11,501 -3,220 8,281

59 53 -55 58 9,259 0.46

63 69 -74 59 20,580 0.93

40 61 -57 44 20,221 0.79

40 70 -60 50 12,646 0.35

40 75 -60 55 10,492 0.26

40 80 -60 60 8,452 0.19

Table 2 : Sensitivity table
Change in operating profit (Rsm) FY08F Drop in inorganic chem margins by 1ppt Drop in fertiliser margins by 1ppt
Source: ABN AMRO estimates

Change in operating profit (%) FY08F 3.9% 3.7% FY09F 3.5% 3.3% FY10F 3.4% 3.1%

FY09F 338 316

FY10F 378 341

307 292

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Contents
I NVES T MENT VIEW

Forget the clutter; focus on value and the long-term story We agree that TCL has an unexciting business model with potentially too many moving parts. However, we believe therein lies the opportunity to pick up a play on India’s agricultural sector at attractive valuations.
PERF ORMA NCE A ND VA LU ATIO N

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A value play At the current market price of Rs307 per share, TCL’s valuations look attractive to us, particularly if we adjust for the fair value of its investment portfolio. We have an SOTP-based target price of Rs450 per share.
CO MPA NY DYNA MI CS

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Unexciting, but solid business model We expect TCL’s inorganic chemicals and fertiliser business to show moderate topline growth with relatively stable margins. A well-managed working capital cycle and low capex leads to strong cash-flow generation.
I NDUST RY DY NA MI CS

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Soda ash; building global scale in a commodity sector With the acquisition of Brunner Mond, TCL now has global scale in soda ash in addition to being a leading player in India. TCL is benefiting from a relatively strong commodity cycle in soda ash.
SE CT OR DY NA MI CS

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Fertilisers; a critical input to India’s agrarian sector Policy controls and regulatory uncertainty have led to private investment in fertiliser sector drying-up since 1990s. A new agri-policy that tackles the subsidy burden and also encourages private investments is called...
RIS K A NA LYS IS

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Risk analysis TCL’s key business risks are cyclical risks associated with the soda ash sector and policy risks in the fertiliser segment.
A PPE NDIX

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New agri-business model – reaching out to India’s farmers TCL is an early mover in establishing a distribution chain to supply agri-inputs to India’s farmers as well as procuring fresh farm produce from them. TCL’s Tata Kisan Sansars currently reaches about 2.5m farmers. Valuing TCL’s investment portfolio TCL’s investment portfolio includes about Rs2.8bn of strategic investments in group companies carried at historical cost. At current market levels, we estimate this investment portfolio could be worth over Rs43bn. Peer group valuations TCL’s current valuations appear to be in line with headline multiples of its peer group. However, its investment portfolio, management pedigree and liquidity make it stand out from its peer group, in our view.

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I N V E S T M E N T

V I E W

Forget the clutter; focus on value and the long-term story
We agree that TCL has an unexciting business model with potentially too many moving parts. However, we believe therein lies the opportunity to pick up a play on India’s agricultural sector at attractive valuations.

Too many moving parts; why even consider investing in Tata Chemicals?
We believe the common perception of Tata Chemicals among investors is that the business model has too many moving parts with presence in too many diverse product categories ranging from soda ash to fertilisers to branded edible salt (See Chart 1 below). To add to that, the fertiliser sector in India is heavily government regulated with controls on pricing, manufacturing and distribution, as well as formulabased returns on capital making the model even more opaque to investors. TCL is clearly not the easiest of business models to analyse or keep track of.
Chart 1 : Tata Chemicals product mix (FY07)
H2So4 1%

TCL’s business model has too many moving parts…

NPK 18% SSP 2%

Soda Ash 21%

Soda Bicarb 2% Caustic Soda 0.4% Bromine 0.5%

DAP 13% STTP 5%

Salt 9% Cement 5% Urea 24%

Source: ABN AMRO, TCL 2007 annual report

In our view, this presents an opportunity for the more patient, meticulous investor. The company has been below the radar for most mainstream investors looking for India exposure (FII holding of just under 6%, at the low end for liquid India stocks), with only six brokers to date covering the stock. As a result, while TCL’s share price has doubled over last three years, it has still underperformed the Sensex, which has risen nearly 280% over this period.

...as a result of which it has been below the radar for most mainstream India investors

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Chart 2 : Though Tata Chemical shares have doubled since Nov-04…
400 350 300 250 200 150 100 50 0 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07

Chart 3 :.. it has still lagged the broader move in the Sensex
350 300 250 200 150 100 50 0 Jan-05 Jul-05 Jan-06 TTCH
Source: ABN AMRO, Bloomberg

Jul-06

Jan-07 SENSEX

Jul-07

Source: ABN AMRO, Bloomberg

Below, we present three key reasons why we decided to cover this stock and why we think it would be worth your while to read the rest of this report and get to grips with the fundamentals of Tata Chemicals.

1) Attractive valuations supported by strong cashflows
Tata Chemicals is a low-profile, unfancied stock, relative to the leading Indian companies, and trades at a hefty discount to the Sensex which we find hard to justify on the basis of fundamentals alone. As seen in Table 3 below, Tata Chemicals trades at nearly 40% P/E discount to the Sensex despite having a similar growth profile and a hefty 60% P/B discount to the Sensex despite an ROE which is pretty close to the broader Sensex ROEs, based on IBES consensus.
Table 3 : TCL trades at a substantial valuation discount to the Sensex
FY07A P/E Tata Chemicals (@ Rs307) BSE Sensex (@ 18,800) valn discount
Source: ABN AMRO, Bloomberg, IBES

TCL's valuation discount to the Sensex is hard to explain on fundamentals alone…

FY08F P/E EPS CAGR (FY07-09F) 13.8 22.6 -40% 18.5% 14.7%

FY08F P/B 2.1 5.6 -60%

FY08F ROE 15.0% 22.0%

FY08F div. yield 3.2% 0.8%

14.8 25.3 -41%

More importantly, Tata Chemicals has strong value support in the form of a dividend FY08F yield of 3.2% compared to the average dividend yield of 0.8% for the Sensex in FY08F. We estimate Tata Chemicals will generate an equity free cash flow of Rs5bn in FY08F, which implies an equity fcf yield of 6.7%, based on the current market cap of Rs70bn. In our view, the company’s cash-flow generation potential should provide strong downside value support to the stock even if the broader Sensex valuations are at risk of change in investor sentiment towards India.

TCL's valuations are backed by strong free cash flow generation

2) A play on structural changes in India’s agri sector
Investors seeking exposure to the India growth story have largely focused on the high-growth IT services sector or infrastructure and urban consumption plays, most of which are now trading on fairly rich valuations. We believe the next leg of the India growth story has to be inclusive of India’s rural population and its agricultural sector. There are still 740m people living in rural India, (70% of India’s population) with over 235m directly employed in agriculture, which contributed nearly 20% to India’s GDP in FY07. Hence, both from a political and economic perspective, raising agricultural productivity has to be a critical part of India’s long-term economic development. Improving agricultural yields will not only benefit a substantial section of India’s
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We believe the next leg of the India growth story has to include the agricultural sector…

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population but is also critical to maintaining India’s domestic food security and feeding a large segment that is gradually rising above the poverty line. We, therefore, believe companies that supply agri-inputs – HYV seeds, pesticides and fertilisers will be key beneficiaries of this structural drive to improve agricultural yields. As Chart 4 below shows, fertiliser usage has a fairly strong impact on crop yields and is one of the critical inputs to India’s agri-industry.
Chart 4 : Fertilisers are a key input in raising crop yields
120 110 100 90 1500 80 70 60 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07E 1400 1300 1200 1900 1800 1700 1600

…companies which help boost agricultural productivity should benefit

Fertilizer intensity (kg/ha)
Source: ABN AMRO, Fertilisers Association of India

Foodgrain yield (Kg/ha)

From a historical perspective, the fertiliser sector in India has been heavily regulated and this has proved to be a deterrent to private investment. With the private sector putting up no greenfield capacity, India’s domestic fertiliser production is now falling well short of its consumption requirements and the country is today one of the largest net importers of fertilisers in the global market.
Chart 5 : Minimal increase in urea/DAP capacity
25,000

Fertiliser imports are rising because of lack of private investment in domestic capacity

Chart 6 : … has led to rising imports of urea/DAP
4,500 4,000

20,000

3,500 3,000

15,000

2,500 2,000

10,000

1,500 1,000

5,000

500 0

0 FY02A FY03A FY04A Urea
Source: ABN AMRO, Fertilisers Association of India

(500) FY05A DAP FY06A FY07A FY02A FY03A FY04A Urea
Source: ABN AMRO, Fertilisers Association of India

FY05A DAP

FY06A

FY07A

Long term, government policy will need to incentivise private sector investment to bridge this gap and ensure steady growth in fertiliser production in India. An interesting point to note here is, that under the current regulated pricing regime, operating margins paid to urea producers are based on 12% post-tax return on capital on their depreciated asset bases. We estimate Tata Chemicals whose Babrala plant was set-up in 1994 gets an operating margin or return on capital base of around Rs1200 to Rs1500 per tonne after passing through input/ manufacturing costs.
Depreciated plants like TCL get lower returns under current fertiliser policy…

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We estimate capital cost per tonne for a new urea plant in India today would be Rs25,000 to Rs30,000. To make a greenfield venture economically viable with at least 10-12% returns, the net operating margin after input/manufacturing costs has to be Rs2,500 to Rs3,600 per tonne, well above what depreciated plants like TCL are getting under the current regulated regime. Players like Tata Chemicals should benefit from any moves towards liberalising the current administered pricing mechanism in fertilisers. Another interesting development is Tata Chemicals’ recent initiative to develop a rural distribution network under the Tata Kisan Vikas Kendra (TKVK) scheme (see Appendix I for details). With about 40 TKVKs and over 800 franchisee TKS’s in operation, this is one of the largest rural distribution networks in India, reaching out to over 27,000 villages and 2.5m farmers (comparable to ITCs e-choupal network). This network not only distributes agri-inputs like seeds, pesticides and, of course, fertilisers to farmers but also provides soft services like weather forecasting, microcredit and access to new farming technology. Tata Chemicals has also formed a JV with Total, Europe, to collect fresh produce from the farmers and distribute it to supermarkets, cold storages etc. We believe this distribution strategy makes Tata Chemicals a clear first mover in tapping into the agricultural supply chain and a potential beneficiary of increased investment in India’s agriculture sector.

Returns for existing plants could rise if fertiliser pricing is decontrolled

TCL is expanding its rural distribution network…

...in order to sell agri-inputs to farmers as well as source fresh farm produce from the farm gate

3) Investment portfolio has more value than perceived
The FY07 annual report of Tata Chemicals shows investments of Rs7.7bn on its consolidated balance sheet. This may seem insignificant given Tata Chemicals’ current mcap of Rs70bn. Tata Chemicals was incorporated in 1939 and, so, is one of the oldest companies in the Tata group. As a result of this history, it carries lot of small minority stakes in Tata group companies on its books. These long-term investments are carried on its balance sheet at historical costs. So while the Rs7.7bn portfolio of investments includes Rs4.9bn of investments in liquid assets like cash mutual funds, which are more or less marked close to fair value, it also includes long-term investments that have a book value of Rs2.8bn, but whose fair value is closer to Rs47bn as shown in table 3 below on the basis of current market prices and imputed fair value. The total value of cash & equivalents works to nearly Rs200 per share, or 65% of Tata Chemicals current mcap. Of particular significance in this exercise is the stake in unlisted group holding company Tata Sons, which is being carried at a historical cost of Rs0.5bn, but whose current fair value is closer to Rs25bn (for details refer to Appendix II).
Table 4 : Estimating fair value of TCL’s investment portfolio
Book value (Rs m) Long-term investments Fully paid ordinary equity share - quoted Fully paid ordinary equity shares - unquoted Cumulative redeemable pref shares - unquoted Current investments Unquoted equity shares Quoted bonds/Units Unquoted units Unquoted mutual funds Total investments
Source: ABN AMRO estimates, Bloomberg

The book value of TCL’s investment portfolio is just Rs7.7bn…

… however, our estimated fair value is close to Rs47bn…

...which amounts to nearly Rs200 per share or 65% of current market cap

Market value (Rs m)

1,360 1,472 450 3,282 3 236 1 4,234 4,473 7,755

15,772 25,661 450 41,884 3 387 1 4,234 4,624 46,508

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We concede that the bulk of these investments are long-term strategic stakes in group companies and that Tata Chemicals is unlikely to unlock their value by selling them any time soon. That said, management has indicated that, should there be a substantive cash call on Tata Chemicals in the future, it would consider offloading some of the more liquid stakes like Tata Consultancy Services. So, while it might be appropriate to take a 25-30% discount to the fair value of the investments, the bigger point we are making is that carrying the investment portfolio at historical costs on the balance sheet has probably led to Tata Chemicals share price not reflecting the true value of its investment portfolio.
Even with a holding company discount of 30%, these investments are a significant value contributor

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A value play
At the current market price of Rs307 per share, TCL’s valuations look attractive to us, particularly if we adjust for the fair value of its investment portfolio. We have an SOTP-based target price of Rs450 per share.

We have a sum-of-the-parts value of Rs450 per share
We value Tata Chemical’s core business operations at Rs90bn using a three-stage DCF model. This implies a FY09F EV/EBITDA of 7.1x for the business, which seems intuitively reasonable. We have added the investment portfolio at conservative 30% holding company discount to the fair value. We have also assumed that Tata Chemicals CBs, which are convertible into shares at Rs225 per share, will be fully converted and have taken the fully diluted share base. This leads us to a fair value of Rs450 per share as shown in table below
Table 5 : Sum-of-the-parts based on three-stage DCF for the core business
Economic Profit Valuation Adjusted Opening Invested Capital NPV of Economic Profit During Explicit Period NPV of Econ Profit of Remaining Business (1, 2) NPV of Econ Profit of Net Inv (Grth Business) (1, 3) Enterprise Value Plus: Other Assets Less: Net Debt/Leases (as at 23 Nov 2007) Equity Value No. Shares (millions) Per Share Equity Value
Source: ABN AMRO estimates

We value TCL at Rs450 per share

Rs m 43,171 5,111 28,507 13,411 90,200 33,709 12,646 111,263 243 450

Rs per share 178 21 117 55 371 139 52 458

Remarks

Implies FY09F EV/ EBITDA of 7.1x At 30% discount to fair value Assuming full conversion of CBs

Valuations look attractive at current market price
As seen from the table below, Tata Chemicals valuations are looking attractive at the current market price. In particular, if you take the enterprise value of the business after stripping value of investments with a 30% holding company discount, the adjusted FY09F EV/EBITDA is just 4.2x and adjusted P/E is just 6.9x.
Table 6 : Valuations look attractive; even more so when adjusted for investments
FY05A P/E P/B Dividend yield (EV less inv)/ EBITDA Adjusted P/E (less inv)
Source: ABN AMRO estimates, Bloomberg

Valuations look even more attractive when adjusted for fair value of investments

FY06A 17.5 3.4 2.6% 7.1 11.9

FY07A 14.8 2.9 3.0% 5.3 10.0

FY08F 13.8 2.1 3.3% 4.9 9.5

FY09F 10.4 1.8 3.8% 4.2 6.9

24.1 3.7 2.3% 10.4 17.1

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Unexciting, but solid business model
We expect TCL’s inorganic chemicals and fertiliser business to show moderate top-line growth with relatively stable margins. A well-managed working capital cycle and low capex leads to strong cash-flow generation.

Two key segments – inorganic chemicals and fertilisers
The business profile of Tata Chemicals Limited (TCL) can be divided into two key business segments – inorganic chemicals and fertilisers – each of which contribute half of consolidated sales. Soda ash is the main component of the inorganic chemicals business. TCL has an integrated soda ash plant in Mithapur, Gujarat, and has dominant share of more than 30% in India’s soda ash market. In 2005, TCL acquired the Brunner Mond group – which has production facilities in UK, Holland and Magadi, Kenya – to become the third-largest soda ash manufacturer in the world. TCL’s cement plant was set-up to handle the effluents coming out of its soda ash complex. Cement production in FY07 was just about 0.5m tons and cement accounted for just over 5% of total consolidated sales. TCL is also the leader in packaged branded edible salt in India with a market share of nearly 47%. While this segment accounted for just Rs3.3bn of sales in FY07 (about 9% of total consolidated sales), it has solid potential for long-term growth as just under 25% of the household salt consumption in India is currently branded.
Chart 7 : Revenue split across two key product segments
80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 FY05A FY06A FY07A FY08F Fertilisers FY09F yoy FY10F 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

Inorganic chemicals and fertilisers are the two key product segments for TCL

Inorganic chemicals include soda ash and its byproducts

Inorganic chem
Source: Company data, ABN AMRO forecasts

In the fertiliser segment, TCL operates a 0.9mtpa urea plant in Babrala, Uttar Pradesh. Babrala is a dual-feed plant (can use both naphtha and natural gas) and is currently the most energy-efficient urea plant in India. In 2003, TCL acquired from HLL the phosphatic fertiliser (DAP, NPK, SSP) business, which includes the manufacturing facility at Haldia, West Bengal, and the Paras brand which has a market share of nearly 40-50% in its command areas. TCL also imports and distributes phosphatic and complex fertilisers. It has established a JV in Morocco called Indo-Maroc Phosphore S.A (IMACID) to secure supplies of rock phosphate and phosphoric acid, a critical raw material for making phosphatic

In fertilisers, TCL has presence across urea as well as phosphates and complex fertilisers

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fertilisers. Morocco is the largest producer of rock phosphate and phosphoric acid in the world and controls nearly 50% of world exports.

Tata Chemicals; operating margins along product segments
Chart 8 below shows TCL’s operating margins based on consolidated sales along product lines. The company’s domestic soda ash margins (20-25%) are higher than those achieved at the overseas soda ash operations of the Brunner Mond group (1012%). The acquisition of Brunner Mond at end-2005 has, therefore, diluted the overall margins of the inorganic chemicals business. We expect FY08 inorganic chemicals margins to drop further as TCL’s operations in Mithapur were hit by heavy rains in 1H08 which affected the brine quality and by operational problems with the natural soda ash kiln in Magadi, Kenya. However, once these operational issues are resolved and pricing on soda ash contracts catches up with rising spot prices, we expect a gradual recovery in the soda ash margins.
Chart 8 : Operating margins along product segments
25.0%

We expect soda ash margins to dip in FY08 due to technical problems in production…

...but to recover heading into FY09 as commodity cycle is still strong

20.0% 15.6% 15.0% 14.3% 10.0% 13.9% 14.7% 15.8% 16.3%

5.0%

0.0% FY05A FY06A FY07A FY08F Fertilisers FY09F Blended margin FY10F

Inorganic chemicals
Source: ABN AMRO estimates, Company data

Margins in the fertiliser segment are expected to improve following the new freight equalisation policy announced in 1H08 and the move to calculate subsidy on a monthly basis rather than quarterly basis should improve fertiliser operating margins as evidenced in the 1H08 results. Overall, on a blended basis, we expect TCL’s FY08-10 operating margins to remain relatively steady at 15-16% and operating profit to be driven largely by volume growth as seen in Chart 9 below
Chart 9 : TCL’s operating profit trend – steady volume-driven growth
12,000 10,000 8,000 6,000 20% 4,000 2,000 0 FY05A FY06A FY07A Operating profit
Source: ABN AMRO estimates, Company data

Fertiliser margins have improved with recent changes in govt. policy

60% 50% 40% 30%

10% 0% -10% FY08F FY09F yoy FY10F

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Capex targeted largely at de-bottlenecking/upgrading of existing units
TCL is budgeting to around Rs1.5bn over two years for the debottlenecking of its Babrala urea plant, which will increase name-plate capacity from 0.85mpta to around 1.2mtpa. It will also be spending another Rs1.5bn-2bn on upgrading its Mithapur complex by adding more captive power units and increasing capacity from 0.9mtpa to 1.2mtpa. Also, TCL has budgeted Rs1.5bn for new business initiatives which include Tata Kisan Kendras, the JV with Total for fresh produce, and the new bio-fuel initiatives. Adding normal maintenance capex of Rs0.5-1bn per annum, the total capex requirement comes to around Rs3.5bn per annum over FY08-09F, which is only slightly above the company’s annual depreciation charge of Rs3bn.
Capex of Rs3.5bn pa largely for debottlenecking of capacity

A relatively well-managed working capital cycle
TCL has maintained relatively tight control of its working capital cycle with net working capital requirement dropping to just 45 days in FY07.
Chart 10 : Well-managed working capital cycle (in days of sales)
100 80 60 40 20 0 -20 -40 -60 -80 -100 FY05A Inventory FY06A FY07A Receivables FY08F Creditors FY09F FY10F 10 0 30 20 50 40 70 60

Working capital has been relatively well-managed

net working capital (RHS)

Source: ABN AMRO estimates, Company data

The key risk here is any delays in reimbursement of fertiliser subsidy from the government. The outstanding fertiliser subsidy was Rs5.7bn as of March 07 and that actually dropped to Rs4.7bn by September 07. However, if the fertiliser subsidy bill keeps rising, delayed payments might be a risk.

Strong free cash-flow generation from core business
With capex levels over FY08-10F broadly tracking depreciation expense and a relatively well-managed working capital cycle averaging around 50-60 days, Tata Chemicals looks well-positioned to translate its reported earnings into strong free cash flow generation (as seen in Chart 11). The free cash flow generation is more than adequate to cover a steady rise in the dividend pay-out (as seen in Chart 12)
TCL's free cash flow generation should be strong enough to reach Rs5bn in FY09F

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Chart 11 : Strong free cash flow generation (FY08-10F)…
15,000 10,000 5,000 0 -5,000 -10,000 -15,000 FY05A FY06A FY07A FY08F FY09F FY10F 8,000 6,000 4,000 2,000 0 -2,000 -4,000 -6,000 -8,000 -10,000 -12,000

Chart 12 : …should support a rising dividend payout
8,000 6,000 4,000 2,000 0 -2,000 -4,000 -6,000 -8,000 -10,000 -12,000 FY05A FY06A FY07A FY08F FY09F FY10F

PAT + Deprn. Capex + Acquisitions
Source: Company data, ABN AMRO forecasts

Change in NWC Free Cash Flow Dividends (Rsm)
Source: Company data, ABN AMRO forecasts

Free Cash Flow (Rsm)

A strong balance sheet
TCL raised US$150m in the form of CBs to fund its acquisition of Brunner Mond in FY06. With the CBs well in the money (conversion at Rs225), we expect most of them to be converted into shares by end-FY08. With further deleveraging coming from cash generated by the business, we expect net debt-equity to drop to 0.35x by FY08 and a further to 0.2x by FY10F giving TCL the balance sheet flexibility to take on future acquisitions or expansion programmes.
Chart 13 : Net debt-equity should drop to 0.35x by FY08F
25,000 1.00 0.90 20,000 0.80 0.70 15,000 0.60 0.50 10,000 0.40 0.30 5,000 0.20 0.10 0 FY05A FY06A Net debt (Rsm)
Source: ABN AMRO estimates, Company data

We expect net debt-equity to drop after the peak hit during the Brunner Mond acquisition

0.00 FY07A FY08F FY09F FY10F

Net debt/ equity (RHS)

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Soda ash; building global scale in a commodity sector
With the acquisition of Brunner Mond, TCL now has global scale in soda ash in addition to being a leading player in India. TCL is benefiting from a relatively strong commodity cycle in soda ash.

Soda ash; a fragmented commodity sector globally
Soda Ash (commercial name “Sodium carbonate”) finds applications mainly in the production of detergents, glass, chemicals, sodium silicate, pulp & paper and water treatment. About 27% of global production of soda ash comes from natural sources while the bulk of it is manufactured synthetically. On TCL’s estimates, global demand stood at 37mtpa growing at about 4-5% pa, while capacity was nominally at 42mtpa. China and USA are the world’s major suppliers of soda ash.
On a global basis, soda ash is a commodity product

TCL has become the third-largest global supplier after acquiring the Brunner Mond group
Realising that scale and cost-competitiveness is critical in the commoditised soda ash market, TCL decided to acquire the Brunner Mond group at end-2005. Brunner Mond has 1.3mtpa of synthetic soda ash capacity in UK and Holland and also 0.7mtpa of natural soda ash capacity in Magadi, Kenya, which is the second largest production base of natural soda ash globally. Natural soda ash has a production cost of half of that of synthetic soda ash.
TCL is now the third largest soda ash producer globally

TCL is the market leader in India with over 30% market share
Per capita consumption of soda ash in India is low (2.7kg) compared to China (9.8kg) and USA (22kg). We expect domestic demand of around 2.8m MT to grow at at least 80% of the GDP growth rate. The detergents & soap and glass industries are the two major consumers of soda ash in India and consume 32% and 21% of the country’s production respectively. There are five main producers of Soda Ash in India: TCL, GHCL, DCW Limited, Nirma and Tuticorin Alkalies. TCL has an integrated soda ash complex at Mithapur, Gujarat, with a capacity of 0.9mtpa, which makes it the market leader with about 30% share of the domestic market.
TCL has over 30% market share in a five-player market in India

Duty protection for soda ash industry has been dropping
Basic customs duty on soda ash in India has dropped sharply over the last decade from 65% in FY95 to 7.5% in FY07. While net imports have risen, as a result, total net imports of soda ash are still less than 10% of total consumption.
Duty levels have dropped, but imports have yet to make a big impact

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Chart 14 : Duty protection has dropped
70% 60% 50% 40% 30% 20% 10% 0% 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07E 2007-08F

Chart 15 : Imports are rising but still a small portion of consumption
0.30 0.25 0.20 0.15 0.10 0.05 2006-07E 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 40 35 30 25 20 15 10 5 0

Import volume in lacs MT
Source: ABN AMRO, Chemical Association of India forecasts

Import duty %

Source: ABN AMRO, Chemical Association of India forecasts

Domestic ex-factory realisations have been on the rise
A strong global economy has seen rising capacity utilisation for soda ash plants globally and consequently rising global prices. Manufacturers in China face increased environmental concerns and might not add capacity as aggressively as before. This has resulted in a rising trend in ex-factory realisations for domestic producers and with spot soda ash prices continuing to rise, we expect newer long-term contracts for soda ash to be marked further upwards.
Chart 16 : Domestic ex-factory realisations on the rise
12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 Apr-97 Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07

Domestic prices have risen in sync with a strong global soda ash market

Source: ABN AMRO, Tata Chemicals

Power and infrastructure are key bottlenecks for Indian producers
India has an abundant supply of the raw materials, viz, limestone & salt for soda ash manufacture. The industry, however, suffers from high power costs as 95% of plants are in Gujarat where power prices are among the highest in the country. TCL is trying to get around the power bottleneck by setting up more captive power capacity at its Mithapur complex. High concentration in Gujarat poses one more challenge, viz, logistics. Given that around 60% of domestic demand comes from regions other than Gujarat, the industry is highly dependant on reliable and cost-effective transport (12-13% of the landed price is towards the logistics cost).
Logistics is another key cost element Domestic producers need to access low-cost power to cut production costs

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Fertilisers; a critical input to India’s agrarian sector
Policy controls and regulatory uncertainty have led to private investment in fertiliser sector drying-up since 1990s. A new agri-policy that tackles the subsidy burden and also encourages private investments is called for.

Global fertiliser industry; Asia is now the key demand centre
As seen from Chart 17 below, global fertiliser consumption was about 147mtpa in 2004 and has been growing at an average of 3% pa over the last decade. Over half of the global consumption of fertilisers is now in Asia with India and China accounting for the major share.
Chart 17 : Global fertiliser consumption
160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5%

India/China are key players in the global fertiliser market

Chart 18 : Asia is biggest consumer of fertilisers

Latin America 10%

Others 8%

Europe 14% N America 14%

Asia 54%

N
Source: ABN AMRO, FAI

P2O5

K2O

growth (yoy)
Source: ABN AMRO, FAI

India can further improve its fertiliser usage
India consumed about 40m tonnes of fertilisers in FY06, representing nearly 25% of global consumption. However, the country still consumes only 98kg of nutrients per hectare of arable land compared to 254kg in China, 301kg in Japan and 407kg in Korea. Other developing nations, including Pakistan and Bangladesh, have higher consumption per hectare at 135kg and 156kg respectively. Therefore, there is a lot of scope to increase this consumption.
India's fertiliser usage is still below norm

However, the fertiliser industry is heavily regulated
The fertiliser industry in India is heavily regulated with the government controlling almost every leg of the supply chain. Farm-gate prices are set by the government and it, in turn, repays the manufacturers the difference between the production costs and farm-gate prices through complex subsidy reimbursement programmes. Urea manufacturers are allowed to pass through normative input costs and are reimbursed capital costs at the rate of 12% post-tax return on capital.
India's fertiliser industry is saddled with heavy government controls…

Policy uncertainty has led to minimal investment in new production capacity
Given the prevailing uncertainty over regulated returns, availability of feedstock (natural gas) as well gas pricing and pass-through of input costs, private sector investment in fertiliser capacity has started to dry up over the last decade. As a
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result, the domestic demand-supply gap has widened leading to a sharp increase in fertiliser imports over the last 4-5 years.
Chart 19 : Urea demand-supply
30,000 25,000 20,000 15,000 2,000 10,000 5,000 0 FY02A FY04A FY06A FY08F FY10F Imports 1,000 0 (1,000) 6,000 5,000 4,000 3,000

Chart 20 : DAP demand-supply
9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 FY02A FY04A Demand
Source: ABN AMRO forecasts, FAI

2,500

2,000

1,500

1,000

500

0 FY06A FY08F Supply FY10F Imports

Demand
Source: ABN AMRO forecasts, FAI

Supply

Control on farm-gate prices has led to increased subsidy burden and a distorted consumption ratio
Urea prices have been regulated at Rs4,830 per ton since early 2003.
Chart 21 : Urea prices have not been raised since Jan 2003
5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07

Urea prices have not risen since 2003...

Farmgate price (Rs./tonne)
Source: ABN AMRO, FAI

In recent times, CIF prices of imported urea have reached nearly US$350 per tonne, ie, landed costs of over Rs13,000 per tonne. Local manufacturers like Tata Chemicals are paid retention prices based on pass-through input costs (natural gas prices are controlled) and a fixed return of 12% on their depreciated capital base. We understand Tata Chemicals’ retention price would average Rs7,500-8,000 per tonne based on current input costs with a fixed return on capital of Rs1,200-1,500 per tonne. With a rising differential between farm-gate prices and prices paid for imports and domestic manufacturers the fertiliser subsidy bill is on the rise as seen in Chart 22 below.

... and are now well below ex-factory as well as import parity prices...

... leading to a rising fertiliser subsidy bill

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Chart 22 : A rising fertiliser subsidy bill
250 1.20% 1.00% 0.80% 150 0.60% 100 0.40% 50 0.20% 0.00% 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

200

0

Amount of subsidy (Rsbn)
Source: ABN AMRO, Union Budget FY07

Subsidy/GDp ratio

Also, as urea prices have been fixed at Rs4,830 per tonne versus Rs.9,350 for DAP and even higher levels for complex fertilisers, the consumption mix in India has been skewed a lot more in favour of urea. India’s N:P:K usage ratio stands at 6:2.5:1 vs the global norm of 4:2:1.

Agri-policy in India needs a radical breakthrough
As we discussed earlier, politically and economically, it is imperative that India steps up investment in its agricultural productivity. The government has limited resources to do this (fertiliser and food subsidies have risen sharply in recent years) and, hence, it is important to attract private investment capital, technology and entrepreneurship into the agricultural sector in India. Fertilisers are a critical agri-input from a farmers perspective. There has been little private-sector investment in this space due to the uncertainty on long-term government policy, pricing of inputs like natural gas and rates of return payable to efficient domestic producers. In the meantime, demand growth and stagnant supply have led to increased import dependence in India, which is now one of the largest importers of urea in the world; this, in itself, is impacting traded global fertiliser prices. Rising landed costs of imports are only adding to India’s fertiliser subsidy bill. Bottom line, while there could be short-term set-backs to private fertiliser producers, due to populist policies, long-term strategic policy requires healthy private sector participation in India’s fertiliser industry. As we have discussed before, a total deregulation of fertiliser pricing could actually raise the capital returns of depreciated plants in the private sector. On the flip side, India also needs to modernise its network for distributing agri-inputs to farmers and procuring farm produce from the farm gate. The public distribution system is inefficient and the unorganised middleman network creams too much from margins in the agri-supply chain. We believe TCL’s TKS network is ideally placed to capture opportunities arising out of the need to modernise India’s agri-supply chain.
India also needs to modernise its rural distribution and procurement network; first movers here should benefit Lack of capacity creation in fertilisers has led to rising imports and a higher subsidy bill India needs to attract private investment to lift agricultural productivity

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Risk analysis
TCL’s key business risks are cyclical risks associated with the soda ash sector and policy risks in the fertiliser segment.

Rising subsidy bill could put pressure on working capital
According to industry sources, total outstanding balance of fertiliser subsidy receivable by the industry from the government was about Rs150bn, of which TCL’s share as of March 07 was about Rs5.6bn. An increase in the amount of subsidy receivable would put pressure on TCL’s working capital needs and give rise to interest costs. There have been talks about the outstanding subsidy being paid in the form of a “fertiliser” bond as with the oil sector, but the exact modalities have not been worked out. In our financial models, we have assumed a moderate expansion in TCL’s net receivable days from 61 days in FY07 to 70 in FY08. Note that TCL’s outstanding subsidies had actually fallen to Rs4.7bn by Sep 07 from Rs5.7bn in Mar 07.
Rising subsidy bill may impact TCL's balance sheet and interest costs

Policy risks with fertiliser segment
The fertiliser sector is heavily regulated in India. Every aspect from sourcing of inputs to manufacturing and distribution is controlled and private players are paid a fixed return on capital, based on certain normative parameters. There is a risk that any changes in policy regarding the calculation of these norms can affect the returns of private players like TCL. While we acknowledge these risks in the short-term, it would be important to note that this policy uncertainty has already acted as a significant deterrent to fresh private sector investment in fertilisers over the last decade as a result of which India’s import dependence has been rising. So from a long-term strategic perspective, government policy cannot afford to risk alienating private sector investment by providing them with unremunerative returns.
Fertiliser segment could be exposed to policy risks

Cyclical risks associated with soda ash segment
Soda ash is a global commodity with India representing less than 7-8% of global consumption. Duty protection levels in India have dropped sharply, which leaves the country vulnerable to dumping from China and US, the two largest manufacturers in the world. While this is a possibility in future, currently global demand-supply is fairly well balanced and environmental concerns associated with the chlor-alkali industry have kept a lid on excessive supply creation across the globe. We expect the current strength in the soda ash cycle to last till FY09. Moreover, TCL has now built global scale with the acquisition of Brunner Mond and its natural soda ash facility in Magadi, Kenya, has a lower cost of manufacturing than synthetic soda ash. We expect further streamlining of costs at the Brunner Mond unit and expansion of capacity at Magadi. The increase of captive power facilities at TCL’s Mithapur plant in India and debottlenecking of capacity should further increase cost-competitiveness.
Soda ash, being a commodity, is exposed to cyclical risks

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New agri-business model – reaching out to India’s farmers
TCL is an early mover in establishing a distribution chain to supply agriinputs to India’s farmers as well as procuring fresh farm produce from them. TCL’s Tata Kisan Sansars currently reaches about 2.5m farmers.

Tata Kisan Vikas Kendras seems a promising initiative
In line with our belief that the next stage of growth in the Indian economy will require structural changes in the rural and agriculture sector, TCL is positioning its agri-business model to reach out to the Indian farmer and take advantage of these trends. TCL has set-up a network of Tata Kisan Vikas Kendras (TKVK) using a hub-and-spoke model. TKVKs are owned by TCL and act as a distribution-cum-farmer training centres and covers up to 20 Tata Kisan Sansars (TKSs), which are based on a franchise model. Each TKS covers about 60 villages. Currently, TCL has about 40 TKVKs, which control nearly 800 TKS’s, reaching out to over 27,200 villages and 2.5m farmers.
Chart 23 : Tata Kisan Vikas Kendras – a hub & spoke distribution model
Village TKS Covers ~ 40 villages & 4800 farmers Village Tata Kisan Vikas Kendra (HUB) TKS Covers ~ 40 villages & 4800 farmers 1. 2. 3. 4. 5. 6. Farmers’ training centre Soil testing lab Farmers libraray Warehouse Demo farms 3 -4 acres land TKS Covers ~ 40 villages & 4800 farmers Village

TCL is building a distribution network to stay ahead of structural changes in rural India

Its TKS network currently reaches out to over 2.5m farmers

Village

Village

Controls 20 TKS

Village

Tata Kisan Sanasar (TKS) Sells products – Seeds, fertilizers, pesticides, agricultural tools Renders services – soil testing, crop loans, advisory

Village

Village

Source: ABN AMRO, Tata Chemicals annual report

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TKS will be a one-stop shop for farming needs
The TKS network runs crop clinics where agronomists use computers to access information from the geographic information system (GIS) and advise farmers on what to grow, where and when to grow it, and how much urea and nutrients to use. At the soil-testing laboratory, technicians analyse soil samples to determine their composition and confirm what the satellite maps have indicated. Additionally, the TKS network operates experimental farms where scientists conduct agricultural research and development. TKSs also stock seeds, pesticides and fertilisers that farmers can buy at affordable prices, and they lease out farm equipment and implements to farmers who cannot afford to buy expensive modern machinery. One of the biggest worries for small farmers in India is finance. The sansars take care of this need too. Farmers can get credit, insure their crops against natural disasters, and even benefit from buyback facilities. Staff members at each sansar are equipped to find solutions to every agriculturerelated problem. A well-stocked library of journals and magazines helps farmers keep abreast of news and the latest global developments. In addition, the sansars mail regular bulletins on farm-related news to subscribers. The training halls at the TKS are used for workshops and the screening of films related to agriculture. The sansars also have exhibition halls where special events — educational, social or just pure entertainment — are held for members of the Tata Kisan Sahyog Parivar, an organisation promoted by the TKS network to build relationships with farmers and their families.
.. both for purchasing agriinputs like seeds, pesticides etc… TKS is a one-stop shop for farmers needs..

Leveraging the distribution network to source fresh farm produce
While the TKS network is a distribution chain for supplying agri-inputs to farmers, it can also be used to source fresh farm produce for sale in modern supermarket chains. TCL has entered into a JV with Total, Europe, to set up a chain of cold-storage and distribution facilities for up-streaming farm produce to the retail chains. We estimate India’s farm produce market is worth over US$40bn pa and currently most of it is being sold in informal “mandis” (rural marketplaces) with poor storage, transportation and logistics facilities. The middlemen, including traders and villagelevel distributors, cream off a big chunk of profits in the agricultural supply chain.
... but also to eventually source fresh farm produce for processing and selling to retail consumption centres

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Valuing TCL’s investment portfolio
TCL’s investment portfolio includes about Rs2.8bn of strategic investments in group companies carried at historical cost. At current market levels, we estimate this investment portfolio could be worth over Rs43bn.

Book value of investments only a fraction of likely market value
As per TCL’s FY07 annual report, the company carries about Rs7.7bn of investments on its books. Of this, Rs4.9bn is largely liquid assets comprising instruments like cash mutual funds, which we estimate have a market value close to the book value. The remaining Rs2.7bn comprises strategic investments in Tata group companies, which have been shown at historical costs in the book. Of these strategic investments, the book value of quoted investments is about Rs1.36bn and those of unquoted investments is about Rs1.4bn. Based on current market prices, the strategic investments like listed shares in Tata Motors, TCS etc are now worth Rs15.8bn as seen in Table 7 below.
Table 7 : Market value of TCL’s listed investments
Book value (Rs m) Tata Steel Limited Tata motors limited Tata tea Limited Titan industries Limited Tata Investmetns corpn Limited Tata Consultancy Services Limited Rallis India Limited Oriental hotels Madras fertilizers limited Indian Hotels Limited Total value of investments
Source: ABN AMRO estimates, Bloomberg

TCL's investment book of Rs7.7bn has liquid assets worth Rs4.9bn

Investments in listed group companies which have a book value of Rs1.36bn but current market value of Rs15.7bn

No of shares ( in m) 3.11 0.60 4.32 1.50 5.30 2.31 1.13 0.43 0.33 6.01

CMP (Rs) 820.5 714.65 776.6 1439.65 672.1 960 460.4 351.25 14.95 137.4

Market value (Rs m) 2,551 431 3,353 2,162 3,560 2,215 518 152 5 826 15,772

502.6 114.7 160.9 223.9 103.4 1.4 190.6 47.90 4.9 9.9 1,360

Of the non-quoted investments, the most interesting is 10,237 shares in Tata Sons with a book value of Rs0.5bn. We estimate Tata Sons has a fair value per share of Rs2.5m based on its holdings (see Table 8 below), which leads to TCL’s investments in Tata Sons having a fair value of Rs25bn. We have not attempted to value other non-quoted investments like Tata Industries and Tata Tele-services on the basis of materiality.
Table 8 : Estimating the fair value of Tata Sons and TCL’s holding in it
Mcap (Rs m) TCS Indian hotels Tata Motors Tata Steel VSNL Tata Chemicals Tata Tea Titan Voltas Tata Elxsi Trent Rallis Tata Investment Corp Tata Teleservices Value of Tata Sons holding (Rs mn) less estimated debt in Tata Sons (Rsm) No of shares in Tata Sons Value per share Rs. Value of 10,237 shares (Rsbn)
Source: ABN AMRO estimates, Bloomberg
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TCL's investment in unlisted Tata Sons alone has a fair value of Rs25bn

% holding 75.98% 12% 21.92% 23.03% 8.51% 14.89% 22.78% 9% 24% 38% 26% 8% 45% 18%

Holding value (Rs m) 713,799 9,849 60,388 138,087 12,745 10,161 10,940 5,668 17,314 2,871 2,665 415 9,028 16,386 1,010,315 20,000 400,000 2,475,788 25.3

939,456 82,832 275,490 599,595 149,768 68,239 48,025 63,905 72,778 7,524 10,265 5,516 20,284 90,482

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Adding the two together, we estimate the total fair value of TCL’s investments to be Rs47bn, well above the carrying value of Rs7.7bn on TCL’s books. We believe consensus tends to overlook the fair value of this investment portfolio.
Table 9 : TCL’s investment portfolio has a total fair value of close to Rs47bn
Book value (Rsm) Long term investments Fully paid ordinary equity share - quoted Fully paid ordinary equity shares - unquoted Cumulative redeemable pref shares - unquoted Current investments Unquoted equity shares Quoted bonds/Units Unquoted units Unquoted mutual funds 3 236 1 4,234 4,473 Total investments
Source: ABN AMRO estimates, Bloomberg

Overall, we estimate fair value of TCL's investment portfolio is nearly Rs47bn

Market value (Rsm)

Market value (US$m)

1,360 1,472 450 3,282

15,772 25,661 450 41,884 3 387 1 4,234 4,624 46,508

394 642 11 1,047 0 10 0 106 116 1,163

7,755

We concede that as most of these stakes are strategic holdings in other Tata group companies, TCL is unlikely to unlock value and realise cash from them anytime soon. So while we would consider taking a 30% discount to estimated value as being fair, we consider it inappropriate to totally ignore the value of strategic holdings in estimating the fair value of TCL, as the market seems currently to be doing.

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Peer group valuations
TCL’s current valuations appear to be in line with headline multiples of its peer group. However, its investment portfolio, management pedigree and liquidity make it stand out from its peer group, in our view.

Ex-investments, TCL trades at a discount to its peer group
The table below shows TCL’s valuations relative to Indian fertiliser companies, agrichemical companies and manufacturers of industrial chemicals. As seen below, TCL’s headline P/E and EV/ EBIT multiples seem to be inline or even at a small discount to the composite peer group. However, if you were to strip out TCL’s value of investments (even at a 30% discount to fair value), TCL’s adjusted FY08F EV/ EBIT would be just 6.8x and adjusted P/E would be just 9.5x, a big discount to its peer group. Note that TCL’s strong management pedigree and its higher liquidity should also warrant a premium to its peer group even on a headline basis, in our view.
Table 10 : TCL’s valuations vs peer group
Market cap Liquidity CMP EV/ EBIT (FY07A) 9.6 12.5 10.5 6.6 17.0 P/E (FY07A) 10.5 13.7 7.0 8.0 22.0 P/E (FY08F) Na 10.8 15.6 8.5 Na P/B (FY07A) 3.8 1.9 1.5 1.8 2.8 P/B ROE

(US$m) (US$m/day) (Rs per share) GODAVARI FERT DEEPAK FERTIL EID PARRY INDIA GUJARAT NARM VLY NATL FERTILIZERS 129 314 348 654 967 0.02 0.81 0.22 1.10 0.23 161 142 156 168 79

(FY08F) computed Na 1.7 2.9 1.6 Na 37% 14% 21% 23% 13%

MONSANTO INDIA UNITED PHOSPHORU

344 1,723

0.32 1.64

1,593 325

24.8 26.2

19.5 23.3

Na 17.9

3.7 4.1

Na 3.2

19% 17%

GUJARAT FLUOROCH HIKAL LTD HINDUSTAN ORGAN TATA CHEMICALS

885 158 114 1,707

0.13 0.06 1.37 3.41

611 420 68 307

13.4 26.8 147.8 12.1

14.6 29.4 26.9 14.8

Na 9.9 Na 13.8

5.0 4.6 2.8 2.9

Na 2.9 Na 2.1

34% 16% 10% 18%

Priced as of close on 23 November 07 Source: ABN AMRO forecasts for Tata Chemicals, Bloomberg forecasts for peer group

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Recommendation structure
Absolute performance, short term (trading) recommendation: A Trading Buy recommendation implies upside of 5% or more and a Trading Sell indicates downside of 5% or more. The trading recommendation time horizon is 0-60 days. For Australian coverage, a Trading Buy recommendation implies upside of 5% or more from the suggested entry price range, and a Trading Sell recommendation implies downside of 5% or more from the suggested entry price range. The trading recommendation time horizon is 0-60 days. Absolute performance, long term (fundamental) recommendation: The recommendation is based on implied upside/downside for the stock from the target price. A Buy/Sell implies upside/downside of 10% or more and a Hold less than 10%. For listed property trusts (LPT) or real estate investment trusts (REIT) the recommendation is based upon the target price plus the dividend yield, ie total return. This structure applies to research on Asian and European stocks published from 1 November 2005; on Australian stocks from 7 November 2006; on continental European small and mid cap stocks from 23 November 2006; and on Brazilian stocks from 18 June 2007. Performance parameters and horizon: Given the volatility of share prices and our pre-disposition not to change recommendations frequently, these performance parameters should be interpreted flexibly. Performance in this context only reflects capital appreciation and the horizon is 12 months. Sector relative to market: The sector view relative to the market is the responsibility of the strategy team. Overweight/Underweight implies upside/downside of 10% or more and Neutral implies less than 10% upside/downside. Target price: The target price is the level the stock should currently trade at if the market were to accept the analyst's view of the stock and if the necessary catalysts were in place to effect this change in perception within the performance horizon. In this way, therefore, the target price abstracts from the need to take a view on the market or sector. If it is felt that the catalysts are not fully in place to effect a re-rating of the stock to its warranted value, the target price will differ from 'fair' value. Asset allocation: The asset allocation is the responsibility of the economics team. The recommended weight (Over, Neutral and Under) for equities, cash and bonds is based on a number of metrics and does not relate to a particular size change in one variable. Stock borrowing rating: The stock borrowing rating is the subjective view and responsibility of the ABN AMRO equity finance team: Easy implies ready availability. Moderate implies some availability. Hard implies availability is tight. Impossible implies no availability.

Distribution of recommendations
The tables below show the distribution of ABN AMRO's recommendations (both long term and trading). The first column displays the distribution of recommendations globally and the second column shows the distribution for the region. Numbers in brackets show the percentage for each category where ABN AMRO has an investment banking relationship.

Long Term recommendations (as at 27 Nov 2007)
Global total (IB%) Buy Add Hold Reduce Sell Total (IB%) 596 (15) 1 (0) 427 (19) 0 (0) 76 (5) 1100 (16) Asia Pacific total (IB%) 392 (4) 1 (0) 258 (4) 0 (0) 52 (0) 703 (3)

Trading recommendations (as at 27 Nov 2007)
Global total (IB%) Trading Buy 6 (0) Asia Pacific total (IB%) 6 (0)

Trading Sell Total (IB%)

0 (0) 6 (0)

0 (0) 6 (0)

Valuation and risks to target price
Tata Chemicals (RIC: TTCH.BO, Rec: Buy, CP: Rs307.00, TP: Rs450.00): We value TCL's core business using three-stage DCF and add the value of its investment portfolio at a 30% discount. The key risks to our target price would be: 1) any adverse changes in soda ash prices due to a weakening of the commodity cycle; 2) any adverse changes in India's fertiliser policy that would affect the returns of private-sector producers and distributors; and 3) further delays in fertiliser subsidy payments, which would impact working capital and, thus, increase interest costs.

Regulatory disclosures
Subject companies: TTCH.BO

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Global disclaimer
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TATA CHEMICALS: KEY FINANCIAL DATA Income statement
Rsm Revenue Cost of sales Operating costs EBITDA DDA & Impairment (ex gw) EBITA Goodwill (amort/impaired) EBIT Net interest Associates (pre-tax) Forex gain / (loss) Exceptionals (pre-tax) Other pre-tax items Reported PTP Taxation Minority interests Exceptionals (post-tax) Other post-tax items Reported net profit Normalised Items Excl. GW Normalised net profit
Source: Company data, ABN AMRO forecasts

FY06A 40344.2 -18265 -14561 7518.2 -1840.4 5677.8 n/a 5677.8 -504.8 n/a n/a n/a 807.9 5980.9 -1723.1 n/a 25.6 0.00 4283.4 25.6 4257.8

FY07A 58096.0 -23606 -24424 10066.5 -2738.8 7327.7 n/a 7327.7 -823.9 n/a n/a n/a 942.7 7446.5 -2400.9 n/a 34.8 0.00 5080.4 34.8 5045.6

FY08F 59941.5 -23753 -25312 10876.5 -3052.8 7823.7 n/a 7823.7 -997.8 n/a n/a n/a 1114.8 7940.7 -2528.3 n/a 1262.4 0.00 6674.8 1262.4 5412.4

FY09F 65350.7 -26794 -25894 12662.5 -3053.4 9609.1 n/a 9609.1 -885.2 n/a n/a n/a 1200.0 9923.9 -2778.7 n/a 0.00 0.00 7145.2 0.00 7145.2

FY10F 71930.5 -29491 -28306 14133.3 -3097.4 11035.9 n/a 11035.9 -730.9 n/a n/a n/a 1201.0 11506.0 -3221.4 n/a 0.00 0.00 8284.6 0.00 8284.6
year to Mar

Balance sheet
Rsm Cash & market secs (1) Other current assets Tangible fixed assets Intang assets (incl gw) Oth non-curr assets Total assets Short term debt (2) Trade & oth current liab Long term debt (3) Oth non-current liab Total liabilities Total equity (incl min) Total liab & sh equity Net debt (2+3-1)
Source: Company data, ABN AMRO forecasts

FY06A 1164.7 17365.5 27794.1 7074.9 6411.0 59810.2 7202.8 15941.8 11074.1 3468.2 37686.9 22123.3 59810.2 17112.2

FY07A 1544.6 18598.4 30560.5 7632.4 8328.2 66664.1 3772.3 19217.4 14869.7 3123.5 40982.9 25681.2 66664.1 17097.4

FY08F 3119.7 20646.4 30986.6 7632.4 8348.6 70733.6 3772.3 18777.2 8869.7 3123.5 34542.7 36191.0 70733.7 9522.3

FY09F 5324.0 23171.8 31433.2 7632.4 8348.6 75910.0 3772.3 19666.4 8869.7 3123.5 35431.9 40478.2 75910.0 7318.0

FY10F 7414.9 26229.8 32335.8 7632.4 8348.6 81961.6 3772.3 20747.8 8869.7 3123.5 36513.3 45448.3 81961.6 5227.1
year ended Mar

Cash flow statement
Rsm EBITDA Change in working capital Net interest (pd) / rec Taxes paid Other oper cash items Cash flow from ops (1) Capex (2) Disposals/(acquisitions) Other investing cash flow Cash flow from invest (3) Incr / (decr) in equity Incr / (decr) in debt Ordinary dividend paid Preferred dividends (4) Other financing cash flow Cash flow from fin (5) Forex & disc ops (6) Inc/(decr) cash (1+3+5+6) Equity FCF (1+2+4)
Lines in bold can be derived from the immediately preceding lines. Source: Company data, ABN AMRO forecasts

FY06A 7518.2 -5231.4 -504.8 -874.0 739.0 1647.0 -1954.8 -9780.3 4670.0 -7065.1 0.00 1020.0 -1589.3 n/a -572.7 -1142.0 3.00 -6557.1 -307.8

FY07A 10066.5 1602.7 -823.9 -2142.0 452.0 9155.3 -5319.8 116.1 -1330.0 -6533.7 0.00 471.0 -1715.7 n/a -1122.0 -2366.7 63.8 318.7 3835.5

FY08F 10876.5 -1225.2 -997.8 -2528.3 0.00 6125.2 -3500.0 0.00 0.00 -3500.0 6000.0 -6000.0 -2165.0 n/a 0.00 -2165.0 0.00 460.3 2625.2

FY09F 12662.5 -1636.2 -885.2 -2778.7 0.00 7362.4 -3500.0 0.00 0.00 -3500.0 0.00 0.00 -2858.1 n/a 0.00 -2858.1 0.00 1004.3 3862.4

FY10F 14133.3 -1976.7 -730.9 -3221.4 0.00 8204.3 -4000.0 0.00 0.00 -4000.0 0.00 0.00 -3313.4 n/a 0.00 -3313.4 0.00 890.9 4204.3
year to Mar

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TATA CHEMICALS: PERFORMANCE AND VALUATION Standard ratios
Performance Sales growth (%) EBITDA growth (%) EBIT growth (%) Normalised EPS growth (%) EBITDA margin (%) EBIT margin (%) Net profit margin (%) Return on avg assets (%) Return on avg equity (%) ROIC (%) ROIC - WACC (%) Valuation EV/sales (x) EV/EBITDA (x) EV/EBITDA @ tgt price (x) EV/EBIT (x) EV/invested capital (x) Price/book value (x) Equity FCF yield (%) Normalised PE (x) Norm PE @tgt price (x) Dividend yield (%) Per share data Tot adj dil sh, ave (m) Reported EPS (INR) Normalised EPS (INR) Dividend per share (INR) Equity FCF per share (INR) Book value per sh (INR) 2.11 11.3 15.6 15.0 2.31 3.38 -0.41 17.6 25.7 2.60 1.47 8.47 11.6 11.6 2.25 2.91 5.13 14.8 21.7 3.05 1.30 7.14 10.1 9.93 1.90 2.07 3.51 13.8 20.2 3.28 1.15 5.96 8.47 7.85 1.76 1.84 5.18 10.4 15.3 3.83 1.02 5.19 7.44 6.65 1.60 1.64 5.64 9.00 13.2 4.44 2.67 8.10 7.17 9.36 2.39 2.95 -2.44 14.3 12.4 0.80 Solvency Net debt to equity (%) Net debt to tot ass (%) Net debt to EBITDA Current ratio (x) Operating CF int cov (x) Dividend cover (x) 2.03 6.01 5.26 7.00 2.20 2.35 8.91 11.8 10.3 0.94 1.79 5.98 5.18 7.10 2.02 1.97 8.82 12.5 10.9 0.94 2.18 13.8 0.63 17.6 3.61 n/a 1.72 n/a n/a 1.30 2.11 11.8 0.55 15.1 3.08 n/a 2.53 n/a n/a 1.43 2.32 9.43 0.37 11.8 2.75 n/a 4.14 n/a n/a 1.74 34.1 46.4 51.1 37.5 18.6 14.1 10.6 8.78 20.2 18.6 6.46
Tata Chemicals Grasim Industries India aggregate

FY06A FY07A FY08F FY09F FY10F 44.0 33.9 29.1 18.5 17.3 12.6 8.68 8.83 21.1 12.9 0.73 3.18 8.05 6.77 7.27 18.1 13.1 9.03 8.82 17.5 13.4 1.26 9.02 16.4 22.8 32.3 19.4 14.7 10.9 10.5 18.6 15.3 3.14 10.1 11.6 14.8 15.9 19.6 15.3 11.5 11.1 19.3 16.7 4.56

FY08F FY09F FY10F 10.3 25.0 26.1 23.9 33.0 28.6 16.5 17.2 23.2 22.0 0.00 21.5 24.6 23.7 20.8 33.9 29.1 16.4 18.4 22.1 21.2 0.00 5.20 -6.72 -8.63 -5.44 30.0 25.2 14.7 16.1 17.1 19.3 0.00

2007 12.1 23.9 25.1 n/a 19.3 14.4 11.4 4.63 23.1 21.6 n/a

2008 4.19 17.2 17.5 n/a 21.7 16.3 12.3 4.37 20.9 19.5 n/a

2009 12.3 14.1 13.9 n/a 28.5 22.1 16.4 5.08 21.7 23.9 n/a

year to Mar

year to Mar

year to Mar

year to Mar

year to Mar

year to Mar

FY06A FY07A FY08F FY09F FY10F 243.5 243.5 243.5 243.0 243.0 17.6 17.5 7.98 -1.26 20.9 20.7 9.36 15.8 27.4 22.2 10.1 10.8 29.4 29.4 11.8 15.9 34.1 34.1 13.6 17.3

FY06A FY07A FY08F FY09F FY10F 77.3 28.6 2.28 0.80 5.99 2.48 66.6 25.6 1.70 0.88 14.7 2.51 26.3 13.5 0.88 1.05 9.67 2.50 18.1 9.64 0.58 1.22 12.5 2.50 11.5 6.38 0.37 1.37 16.6 2.50

90.9 105.5 148.6 166.6 187.0
year to Mar

year to Mar

Priced as follows: TTCH.BO - Rs307.00; GRAS.BO - Rs3734.20 Source: Company data, ABN AMRO forecasts

TATA CHEMICALS: VALUATION METHODOLOGY
Economic Profit Valuation Adjusted Opening Invested Capital NPV of Economic Profit During Explicit Period NPV of Econ Profit of Remaining Business (1, 2) NPV of Econ Profit of Net Inv (Grth Business) (1, 3) Enterprise Value Plus: Other Assets Less: Minorities Less: Net Debt / Leases (as at 26 Nov 2007) Equity Value No. Shares (millions) Per Share Equity Value Current Share Price Sensitivity Table 8.0% 9.0% 10.0% 11.0% 12.0% 4 467 436 408 383 360 Rsm 43186 5105 28530 13421 90241 33709 0 12646 111304 243 458 307 No of Years in Fade Period 6 481 446 416 389 365 8 494 457 424 395 369 10 507 466 431 400 373 12 520 476 438 406 377 % 48 6 32 15 100 37 0 14 123 Discounted Cash Flow Valuation Rsm Value of Phase 1: Explicit (2008 to 2010) 9032 Value of Phase 2: Value Driver (2011 to 2020) 36218 Value of Phase 3: Fade (2021 to 2037) 28958 Terminal Value 16032 Enterprise Value 90241 FCF Grth Rate at end of Phs 1 implied by DCF Valuation FCF Grth Rate at end of Phs 1 implied by Current Price Returns, WACC and NPV of Free Cash Flow
25% 20% 15% 10% 5% 0% 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0

% 10 40 32 18 100 5.0 1.9

Performance Summary Invested Capital Growth (%) Operating Margin (%) Capital Turnover (x) 2008 4.1 13.1 1.5 2009 5.0 14.7 1.6 2010 6.6 15.3 1.6

WACC

Phase 2 Avg (2011 - 2020) 7.0 16.0 1.8

Phase 1 NPV of FCF (RHS) Phase 3 NPV of FCF (RHS) Growth Business ROIC WACC

Phase 2 NPV of FCF (RHS) Total Business ROIC Remaining Business ROIC

1. In periods following the Explicit Period i.e. Phase 2 and Phase 3 2. Remaining Business is defined as Capital as at the end of Phase 1 and capex = depreciation thereafter 3. Net Investment is defined as capex over and above depreciation after Phase 1 Source: ABN AMRO forecasts

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Strategic & competitive overview

Tata Chemicals
Company description Buy Price relative to country
120 110 100 90 80 70 60 Nov Mar 04 05

Tata Chemicals is part of the Tata group of companies, one of India's leading business groups. It was incorporated in 1939 and has since grown to become India's leading manufacturer of inorganic chemicals with a domestic market share of over 30% in soda ash in India. It is also a leading manufacturer and distributor of fertilisers in India, and its branded salt product called 'Tata Namak' has a market share of over 50% in India's branded salt market. TCL operates the largest and most integrated inorganic chemicals complex in India, at Mithapur in Gujarat, an integrated urea plant in Babrala in Uttar Pradesh and a phosphatic fertiliser complex at Haldia in West Bengal. It is in the process of establishing a chain of one-stop shop for farmers called Tata Kisan Vikas Kendras, which use modern technology to distribute agri-inputs and farming expertise to the Indian farming community.

Jul 05

Oct Feb Jun Sep Jan Apr Aug Nov 05 06 06 06 07 07 07 07

Strategic analysis

Average SWOT company score:

4

Product mix FY07
NPK 17.8% H2So4 0.7% Soda Ash 21.1% Caustic Soda 0.4% Soda Bicarb 1.9% Bromine 0.5% Salt 9.2% Urea 24.1% Cement 5.4%

Strengths

5
SSP 1.5% DAP 12.7% STTP 4.7%

TCL has developed global production scale in soda ash, which is a commoditised product. It has presence across all key fertiliser segments - urea as well as phosphatics and NPK. The company is also strengthening its rural distribution infrastructure by setting up Tata Kisan Vikas Kendras.

Weaknesses

3

Soda ash, being a commodity product, is subject to industry cycles. Any over-capacity in China or the US could lead to short-term dumping of products into India. The fertiliser segment is highly regulated in India and, therefore, subject to policy risks.

Source: Company data , ABN AMRO

Market data
Headquarters Bombay House, 24 Homi Mody Street, Fort, Mumbai 400 001, India Website www.tatachemicals.com Shares in issue 222.0m Freefloat 70% Majority shareholders Institutions (37%), Public (32%), Tata group (32%)

Opportunities

4

Fertiliser sector reforms could improve returns for producers like TCL with depreciated asset bases. Increased political focus on investing in India's agricultural sector to improve food security and lift the rural economy would be positive.

Threats

3

Increase in fertiliser subsidies and inadequate government budgeting for these could lead to a crunch in working capital for fertiliser companies, including TCL.
Scoring range is 1-5 (high score is good)

India Country view Neutral Country rel to Asia Pacific
230 210 190 170 150 130 110 90 Nov Mar Jun Oct Feb Jun Sep Dec Apr Aug Nov 04 05 05 05 06 06 06 06 07 07 07

The ABN AMRO Indian PMI suggests the economy is still powering ahead despite the global headwinds, thanks to its domestically-oriented economic structure. Moreover inflationary pressure has eased with the recent rate hikes by the RBI. At the sector level, we still like autos (commercial vehicles), software and construction-related stocks as infrastructure spending should be a growth driver in FY08.
The country view is set in consultation with the relevant company analyst but is the ultimate responsibility of the Strategy Team.

Competitive position

Average competitive score:

3-

Broker recommendations
6 5 4 3 2 1 0 Buy
Source: Bloomberg

Supplier power

3+

Input costs in fertilisers are passed through under the current controlled pricing regime. For soda ash, TCL is looking to develop captive plants to reduce dependence on power suppliers.

Barriers to entry

4+

In both fertilisers and soda ash segments, manufacturing scale and capital costs to set up a facility are the key barriers to entry.

Customer power

4-

Soda ash is a commodity product and therefore manufacturers have little pricing power. Fertiliser, being a controlled sector, leaves manufacturers with little ability to influence pricing at present.

Hold

Sell

Substitute products
There are no real substitutes for soda ash or fertilisers.

24-

Rivalry

For soda ash, TCL has over 30% market share in India. Globally, the sector is still fragmented, but we see some cross-border consolidation. The fertiliser industry in India is government-controlled.
Scoring range 1-5 (high score is good) Plus = getting better Minus = getting worse

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Textile Sector
India Research

Tata Chemicals
CMP: Rs303
Rohit Nagraj
Tel: 022 - 4040 3800 Ext: 340 E-mail:[email protected]

Buy
Target Price: Rs387 (12 Months)
‘Aspiring to touch New Horizons’ Tata Chemicals (TCL) is a leading player in inorganic chemicals and the largest player in soda ash in India. With the Brunner Mond acquisition, TCL has now become the third largest soda ash player in the world with over 3.0mt capacity. Rising demand and strong soda ash prices thereof coupled with backward integration into phosphoric acid (through 33% stake in IMACID) augurs well for TCL. We believe, going ahead, a favourable business environment and capacity additions will sustain the company’s Earnings momentum. At the CMP of Rs303, the stock is available at 10.9x consolidated FY2008E EPS of Rs27.8 and 9.0x consolidated FY2009E EPS of Rs33.6. We Initiate Coverage on the stock, with a Buy recommendation and Target Price of Rs387. Strong Soda Ash demand to keep prices firm: Global soda ash demand has been growing 3-4% pa, in the last few years and is expected to continue to grow at same levels over the next 3-4 years as well. Domestic demand for soda ash is expected to grow at 4.5-5% pa following demand from detergents (3-3.5%) and rising construction activity fueling glass demand. We believe that strong demand, high utilisation rates and slower pace in capacity additions would keep the soda ash prices firm over the next 2-3 years. Capacity expansions to meet rising demand for Soda Ash: TCL currently has over 3.0mt of consolidated soda ash capacity. To meet the rising demand for soda ash TCL has planned capex Rs300-350cr to augment its domestic and international soda ash capacity by over 6,00,000 tonnes over the next couple of years. TCL's new soda ash capacities are expected to come on stream when there would be a capacity crunch globally and soda ash prices are ruling strong. Branded Salt and Cement to be Earnings' accretive: We expect TCL's Salt sales to grow at a CAGR of 9-10% over the next couple of years. On the back of strong cement demand, TCL is expanding capacity of its Mithapur plant by over 20% from 0.5mt to 0.6mt, which will add to Earnings. Key Financials (Consolidated)
Y/E March (Rs cr) Net Sales % chg Net Profit % chg EPS (Rs) EBITDA Margin (%) P/E (x) P/CEPS (x) RoE (%) RoCE (%) P/BV (x) EV/ Sales (x) EV/ EBITDA (x)
Source: Company, Angel Research

Stock Info
Sector Market Cap (Rs cr) Beta 52 Week High / Low Avg Daily Volume Face Value (Rs) BSE Sensex Nifty BSE Code NSE Code Reuters Code Bloomberg Code Shareholding Pattern (%) Promoters MF / Banks / Indian FIs FII / NRIs / OCBs Indian Public / Others 31.6 30.8 6.0 31.6 Chemicals 6,519 0.54 340/187 133356 10 18,603 5,561 500770 TATACHEM TTCH.BO TTCH IN

FY2006 4,034 428.3 19.9 18.8 15.2 10.6 19.4 11.9 2.9 2.0 10.9

FY2007 5,810 44.0 508.0 18.6 23.6 17.4 12.8 8.3 19.8 13.3 2.5 1.4 8.1

FY2008E 6,374 9.7 599.0 17.9 27.8 17.5 10.9 7.3 20.3 14.4 2.2 1.3 7.3

FY2009E 7,071 10.9 723.0 20.7 33.6 18.5 9.0 6.4 21.3 16.9 1.9 1.1 5.9

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TCL enjoys leadership position in the domestic soda ash segment with a sizeable marketshare of around 32%

Company Background
TCL is a leading player in the inorganic chemicals segment in India. TCL’s business is classified into two segments viz., inorganic chemicals (including food additives) and fertilisers, which contributed 54% and 46% to FY2007 consolidated Top-line, respectively. On a standalone basis, the segments contributed 37% and 63% to Top-line respectively, in FY2007. Inorganic chemicals comprise soda ash, salt, cement, etc., while fertilisers comprise phosphatic fertilisers like di-ammonium phosphate (DAP), mono-ammonium phosphate (MOP), NPK, etc. TCL’s products find application in various industries ranging from agriculture to pharmaceutical. Exhibit 1: Revenue Break-up - FY2007

Source: Company, Angel Research

Inorganic Chemicals: The company‘s inorganic chemicals facility is located at Mithapur, Gujarat. TCL’s urea plant is located at Babrala, Uttar Pradesh while phosphatic fertilisers are manufactured at Haldia, West Bengal. TCL enjoys leadership position in the domestic soda ash segment with a sizeable marketshare of around 32%. Soda ash is primarily used by the detergents and glass industries. TCL is a clear leader in the branded edible Salts category Salt: In the branded edible salts category, which is highly fragmented and unorganised, TCL is a clear leader with a marketshare of over 47%. TCL is a dominant player in the western and northern regions, and has plans to tap the eastern and southern markets. In line with this, it has launched the low-priced I-Shakti salt in the south, which has met with encouraging response. Cement: To reduce effluents and waste, TCL had set up a cement unit in 1993. On the back of enhanced construction activity in the country, strong demand for cement and firm cement prices thereof, this venture has since become a profitable one for the company. Pertinently, TCL has been operating its cement plant at more than 115% capacity utilisation. TCL sells the cement in the neighbouring areas of Saurashtra and Kutch under the Shudh brand. Fertilisers: TCL derives majority of its revenues (stand-alone) from the Fertiliser segment where it is focused primarily on phosphatic fertilisers and urea. Although, the urea prices are government regulated, due to higher efficiency (energy usage ratio of 5.2Gcal/ MT being lowest in the country) and higher capacity utilisation (over 137% during FY2007) the company has been able to register good Margins in this segment. TCL’s phosphatic fertilisers witnessed good demand following the government’s emphasis on increasing farm product output on account of which it has increased investments in the sector. Sement-wise performance All the business segments of TCL fared well during FY2007 on the back of strong demand from the domestic and international markets. TCL’s domestic Soda Ash sales increased 6.7% yoy to Rs679cr (Rs636cr) while Exports to the Middle East, South Asia and SE Asia amounted to Rs75cr in FY2007. Strong international
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TCL has been operating its cement plant at more than 115% capacity utilisation

TCL has increased investments in the fertiliser segment following government’s emphasis on increasing farm product output

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India Research soda ash prices helped the company clock good Margins in the product during FY2007. Sodium bicarbonate, which is used as poultry feed and as a ‘raising agent’ in bakery products, witnessed a significant jump of 15.5% yoy to Rs66.8cr (Rs57.8cr). Strong demand and prices in cement helped TCL post 35.5% yoy jump in cement revenues from Rs142.5cr in FY2006 to Rs193.2cr in FY2007.

Efficiency and high productivity have helped TCL register good Margins in fertilisers even though the fertiliser prices are government regulated

Tata Salt continues to be a market leader in the branded salts category and witnessed 6.5% yoy growth to Rs330.3cr (Rs310.3cr) in FY2007. The government’s emphasis on increasing farm product output has been the growth driver for fertilisers. Efficiency and high productivity have helped TCL register good Margins in fertilisers even though the fertiliser prices are government regulated. In line with this, revenues from Urea jumped 19.6% yoy to Rs863.5cr (Rs722.1cr) in FY2007 while revenues from other fertilisers including NPK, DAP, MOP, etc., moved up by 8% yoy to Rs1,649.8cr (Rs1,527.9cr) in FY2007. Exhibit 2: Revenue profile - Across Product categories (Standalone)

Source: Company, Angel Research

TCL’s inorganic initiatives have been a key driver of growth over the past few years

TCL has also been focusing on developing newer applications and expanding its reach globally, primarily in the European markets. Sodium tripolyphosphate (STPP) came into TCL’s portfolio consequent to the merger of Hind Lever Chemicals with itself. Post the merger, STPP witnessed significant demand (mainly from the detergents segment) and clocked a 126.7% yoy surge in revenues to Rs168.7cr (Rs74.4cr) in FY2007. Strengthening overseas position TCL has been growing both organically as well as inorganically. However, TCL’s inorganic initiatives have been a key driver of growth over the past few years. In line with this, TCL made two major acquisitions viz., bought 33% stake in IMACID – a phosphoric acid manufacturer based in Morocco, and acquired Brunner Mond, a major soda ash player based in Europe. TCL acquired 33% stake from the joint venture (JV) partners of IMACID for a consideration of Rs166cr (US $38mn) in March 2005. IMACID was a JV between OCP (a stateowned company in the Kingdom of Morocco) and Chambal Fertilisers & Chemicals (engaged in the manufacture of phosphoric acid). This acquisition has insulated TCL from any supply disruptions and firming up of phosphoric acid prices. Earlier, TCL used to import phosphoric acid for its fertiliser unit, and in the recent past phosphoric acid prices have been on an uptrend due to the demand-supply imbalance. Hence, the acquisition augurs well for TCL. However, TCL also augmented its own phosphoric acid capacity by 33% in FY2007 to meet the rising demand requirements, which would get reflected in its FY2008E and FY2009E performance. It may be noted here that although TCL procures phosphoric acid at a higher price from IMACID, ultimately it reflects positively in the consolidated Earnings of the company.

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India Research Exhibit 3: Phosphoric Acid Price trend

The Brunner Mond, Europe acquisition is expected to help TCL gain a strong foothold in the global soda ash market

Source: Cris Infac, Angel Research

Post backward integration into the manufacture of phosphoric acids, TCL acquired Brunner Mond, Europe, a much bigger soda ash player with over 2.0mt soda ash capacity. TCL paid about Rs800cr for acquiring the company. With this acquisition, TCL has now become the third largest soda ash player in the world with a cumulative capacity of about 3.0mt. This acquisition is expected to help TCL gain a strong foothold in the global soda ash market. Exhibit 4: Global Soda ash players and their capacities

Source: Solvay, Angel Research

To take the advantage of favourable demand-supply situation, TCL is scaling up capacity of its low-cost Magadi facility by over 2x to 7,15,000tpa

Brunner Mond has operations located in three countries including the UK, the Netherlands and Kenya. The company produces over 1.6mtpa of soda ash at these facilities, which includes 9,00,000tpa at Cheshire, UK, 3,30,000tpa at its Netherlands unit and 3,50,000tpa at the Magadi unit, Kenya. The company’s facilities in the UK and the Netherlands produce soda ash using the Solvay process (synthetically) whereas the Magadi facility produces from Trona (a naturally occurring mineral). Since soda ash at Magadi is recovered from the natural mineral of Trona, the manufacturing cost of the plant is the lowest in the world. To take the advantage of favourable demand-supply situation, TCL is scaling up capacity of its Magadi facility by over 2x to 7,15,000tpa.

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Global soda ash demand is growing at 3-4% pa., and is expected to maintain such growth over the next 3-4 years as well

Investment Argument
Strong Soda Ash demand to keep prices firm Currently, the global soda ash capacity is estimated at 48mt, with China being a dominant (16mt) player followed by the US (14mt). On the other hand, global soda ash demand is growing at 3-4% pa, and is expected to maintain such growth over the next 3-4 years as well. Majority of the soda ash demand is emanating from the Asian and Latin American economies. Even though demand is surging, new capacity addition is lagging the demand growth on account of which the prices of soda ash have firmed up globally. Utilisation rates have also shot up by over 90% globally, which has resulted in the soda ash prices soaring. Some expansion plans and projects in China have been delayed and hence the newer capacities are likely to come up only post 2010. This augurs well for the soda ash prices till then. Currently, the international soda ash prices are hovering at US $250-300/ tonne. Exhibit 5: Domestic Soda Ash price movement

The domestic soda ash prices, which are currently hovering at Rs11,000/tonne levels have strengthened on the back of the strong international prices
Source: Cris Infac, Angel Research

The domestic soda ash demand is expected to rise at a healthy 4.5-5% pa owing to the demand from detergents (3-3.5% growth) and rising construction activity fueling demand from the glass industry. Although 42% of the total demand for soda ash comes from the detergents segment and 23% comes from the glass industry, demand from the glass segment is expected to grow in double digits. Over the past few years, capacity utilisation has been in excess of 80%, which is expected to reduce once new capacities come up. The domestic soda ash prices, which are currently hovering at Rs11,000/tonne levels have strengthened on the back of the strong international prices. We believe that strong demand, high utilisation rates and slower pace in capacity additions globally will keep the soda ash prices firm over the next 2-3 years as well. Strong demand, high utilisation rates and slower pace in capacity additions are expected to keep the soda ash prices firm over the next 2-3 years Exhibit 6: Domestic Demand and Capacity Utilisation
Domestic Demand-Soda Ash Consumption % chg Capacity Capacity Utilisation (%) 2,406 79.2 FY02 1,906 FY03 2,004 5.1 2,626 76.3 FY04 2,135 6.5 2,626 81.3 FY05 2,162 1.3 2,749 78.6 FY06 2,289 5.9 2,749 83.3 FY07E 2,366 3.4 2,959 80.0

Source: Cris Infac, Angel Research, Note: All quantities are in ,000 tonnes

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India Research Capacity expansions on the back of rising demand TCL has close to 3.0mt of consolidated soda ash capacity. Brunner Mond UK and the Netherlands primarily serve the European markets whereas Magadi, the Kenyan plant serves the South African, SE Asian and Indian markets. Rising soda ash demand has prompted TCL to augment its domestic as well as international soda ash capacity by over 6,00,000tpa over the next couple of years. The Magadi plant produces soda ash from Trona, a natural mineral having significant deposits in Lake Magadi and has a regeneration rate of 1.0mtpa. Magadi being the lowest cost producer of soda ash, TCL is doubling capacity of the plant to 7,15,000tpa (earlier 3,50,000tpa). The expanded capacity was expected to come on stream during Q1FY2008 but because of certain operational problems in the furnace, the new capacity has been delayed and is now expected to come on stream by the end of FY2008. Although, the additional capacity has got delayed, TCL has made alternative arrangements with a smaller furnace and is currently operating 30% of the expanded capacity. Exhibit 7: Capacity expansion plans and outlay
Capacity expansion (,000tonnes) Soda Ash - Mithapur Cement Salt Urea Soda Ash - Magadi Phosphatic Fertilizers - Haldia
Source: Company, Angel Research

Rising soda ash demand has prompted TCL to augment its domestic and international soda ash capacity by over 6,00,000tpa over the next couple of years

TCL is doubling capacity of its low-cost Magadi plant to 7,15,000tpa (earlier 3,50,000tpa)

Current 920 500 475 865 350

Expanded 1,200 600 600 1,200 715

Investment (Rs cr) 300

150 16-20 50

TCL’s new soda ash capacities are expected to come on stream at a time when there exists a capacity crunch globally and the soda ash prices are ruling firm

Total capex for capacity expansion is estimated at Rs500-550cr, which would be funded though a combination of foreign currency debt and internal accruals. Recently, TCL raised US $100mn foreign currency debt through its subsidiary, which will be utilised for its expansion plans, both domestic and overseas. TCL’s new soda ash capacities are expected to come on stream at a time when there exists a capacity crunch globally and the soda ash prices are ruling firm. This is expected to maintain the company’s Earnings momentum going ahead. Branded Salt and Cement to be Earnings’ accretive In the branded Salts category, TCL is a clear leader with over 50% marketshare. In organised Retail segment (malls), TCL has garnered over 58% marketshare. Currently, TCL is operating its salt works at over 90% capacity utilisation. Hence, TCL is expanding capacity by over 26% over the next couple of years. TCL’s newly launched I-Shakti brand is doing extremely well in the southern market. In October 2007, TCL launched its low sodium Tata Salt Lite brand in Delhi, Mumbai and Pune. At a higher price point of Rs18/kg, Tata Salt Lite is targeted at the urban, metro and semi metro and health conscious population. TCL’s Salt sales, over the last three years, have grown at a CAGR of 14.6%, and are expected to grow at a CAGR of 9-10% over the next couple of years. We expect the company to grow its Salt sales in FY2009E on the back of expanded capacity and new launches (I-Shakti and Tata Salt Lite).

TCL is operating its Salt works at over 90% capacity utilisation

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India Research Exhibit 8: Salt and Cement volumes and Capacity Utilisation

We expect the company to grow its Salt sales in FY2009E on the back of expanded capacity and new launches

Source: Company, Angel Research

We believe that even if the cement prices cool off post commissioning of the new capacities, incremental volumes will keep Earnings of this segment intact

TCL forayed into the manufacture of Cement primarily as a waste disposal strategy. But, this venture has grown profitable and is now contributing over 5% to the company’s standalone Top-line. The infrastructure and construction boom in India has propelled growth in cement consumption. Besides, the new cement capacities are struggling to keep pace with the rising demand, which has resulted in firming up of cement prices by around 100% over the past one and a half years. Newer capacities are likely to come up over the next 12-18 months, till such time we expect the cement prices to remain firm. As for TCL, on the back of strong demand it is expanding capacity of its Mithapur plant by over 20% from 0.5mt to 0.6mt. We believe that even if the cement prices cool off post commissioning of the new capacities, incremental volumes will keep Earnings of this segment intact. New initiatives Tata Kisan Sansar: Tata Kisan Sansar (TKS) outlets serve the farmer’s needs by supplying agricultural inputs including fertilisers and currently operate in the Northern and Eastern markets with over 600 outlets. Through this initiative, TCL has established strong relationships with the farmers and a large number of touch points with the farmers. This initiative has helped TCL understand the requirements of the farmers, which can give rise to future business and going ahead, help it in procurement and contract farming. Fresh Produce Business: In January 2007, TCL formed a 50:50 JV with Total Produce Plc., Ireland. Total Produce is Europe’s largest fresh produce company and brings in over 100 years of experience in distribution and management of supply chain for perishable items. Rising income levels and health awareness is propelling growth of fresh foods in India. Currently, because of lack of proper supply chain, cold chain, etc., the farmers are facing losses from perishable agri-produce. This JV will address this issue and set up state-of-the-art distribution chains for fresh fruits and vegetables across India. TCL has already developed touch points with farmers through its TKS initiative, which will be utilised for procurement and primary processing of the fresh produce. The JV is still at a nascent stage but it offers a sizeable opportunity going ahead with the Retail sector witnessing boom times in India. TCL has set aside Rs50cr for investments in this JV and has short listed a site at Ludhiana. TCL is on the look out for another site too in the Eastern part of the country, which is expected to be decided shortly. Bio-fuels and Innovation center at Pune: Rising energy demand coupled with rising crude oil prices have prompted companies all over world to look at alternatives. TCL is also actively pursuing opportunities in the bio-ethanol and bio-diesel space. It has earmarked Rs50cr for this venture and has already placed an order with Praj Industries for a 30KL/ day bio-ethanol plant, which will be operational in FY2009. In the recent past, bio-fuel has been a buzzing space and it is expected to do well in the future given the rise in domestic demand for energy.

TCL has established strong relationships with the farmers and a large number of touch points with the farmers

TCL’s JV in its Fresh Produce business is at a nascent stage but it offers a sizeable opportunity going ahead with the Retail sector witnessing boom times in India

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India Research As a part of its growth strategy and adoption of newer technologies, TCL is now focusing on Biotechnology and Nanotechnology also. To promote studies in these areas, it has set up a team of over 20 scientists which would be increased to over 50 over the next three years. TCL has also opened an Innovation Center at Pune where the research work will be conducted and has earmarked over Rs50cr investment for this initiative spread over five years. We expect this initiative to help TCL diversify into newer technologies and applications going ahead. Concerns Rising ocean freight rates, naphtha costs Rising crude oil prices have impacted freight rates across segments including road, ocean and air. Although, air freight rates do not impact TCL, the rise in ocean freight rates has a significant impact on its overseas business. The exports from Brunner Mond are primarily carried out by the ocean route. Hence, a rise in ocean freight rates would hit TCL’s transportation costs. However, increase in the product prices has actually nullified the effect of rising freight rates. But, if crude inches up further, it will definitely impact the company’s consolidated Margins. Domestically however, heat from higher crude oil prices has not yet been sensed as there has been no increase in the retail fuel prices. But, given the current scenario, we believe a fuel price hike is inevitable. Exhibit 9: Coke and Naphtha Price movement

Source: Cris Infac, Angel Research

Apart from freight rates, the coke and naphtha prices have also inched up in the past one year. However, as of now TCL is insulated from any price rise in coke, as it is covered for coke supplies till the end of FY2008. Hence, the prices will be revised only in April 2008 for FY2009. Rise in crude oil prices has a direct co-relation with the naphtha prices and there has been a stupendous rise in naphtha prices over the past couple of years. We believe that both the coke and naphtha prices are likely to remain strong going ahead but, the rise will be offset by the rising product prices. Natural gas prices have been more or less constant, but there is a possibility of revising the gas prices upwards given the bickering by the E&P companies. Delay in subsidy payment impacts working capital Since the fertiliser sector in India is regulated and the prices of fertilisers are fixed by the government, the shortfall between the market price and actual selling price to the end user is compensated by subsidy. Although, the government makes an allocation for the subsidy in the Union Budget, the actual outlay usually gets delayed and hence the cash flows for the companies get impacted. The delay in receipt of subsidy puts pressure on the working capital thus impacting profitability as the interest burden goes up (on borrowed working capital). This is hitting TCL’s standalone performance but the impact on consolidated performance is relatively less.

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India Research Financial Performance Q2FY2008 numbers Due to the robust demand and tight supply position in the global market, the soda ash prices continue to rule firm globally. This has helped TCL report a 8.7% yoy growth in consolidated Revenues to Rs1,733cr (Rs1,594cr) and 11.5% yoy jump in standalone Revenues to Rs1,255cr (Rs1,126cr) in Q2FY2008. The benefits derived from strong product prices and Rupee appreciation (in case of imports) were negated by an increase in the key raw material price during the quarter denting Operating Margins. Increasing fuel costs, trade and port congestion increased the ocean freight rates, and rise in coke and coal prices impacted the company’s Operating Margins. Consolidated Operating Margins declined by 40bp yoy to 16.9% (17.3%) whereas standalone Operating Margins fell by 80bp yoy to 16.7% (17.5%). Standalone Consolidated results witnessed a sharp jump in foreign exchange gains due to Rupee appreciation at Rs45.1cr (Rs1.9cr), which aided the surge in Profitability. On the one hand, while standalone PAT declined 9.6% yoy to Rs143cr (Rs158cr), on the other, consolidated PAT increased 12.2% yoy to Rs208cr (Rs185cr). Chemicals Division: Domestic production, which stood lower at 1,50,000 tonnes (1,80,000 tonnes) was impacted by the floods in Mithapur, Gujarat and power shortage, which affected the company’s plant operations severely. Brunner Mond, Europe registered a strong performance during Q2FY2008 on the back of firm soda ash prices, although the sales volumes remained stable at 3,00,000 tonnes (2,99,000 tonnes). Fertiliser Division: The company’s Fertiliser sales remained robust during Q2FY2008 with an overall 8% yoy growth in consumption. Urea sales went up 7.3% yoy to 3,36,000 tonnes (3,13,000 tonnes). Phosphatic fertiliser (NPK, DAP) sales grew 12% to 2,89,000 tonnes (2,58,000 tonnes). Food Additives and Cement Divisions: TCL continues to be a dominant player in the domestic edible Salt market with a 50% marketshare in the branded category. Cement demand was lower during the quarter primarily due to the heavy rains. But, the prices continue to rule strong.

Robust soda ash prices helped TCL report a 8.7% yoy growth in consolidated Revenues to Rs1,733cr (Rs1,594cr) in Q2FY2008

OPM was impacted by increasing fuel costs, trade and port congestion which increased the ocean freight rates, and rise in coke and coal prices

TCL’s consolidated 1HFY2008 Bottom-line surged 26.1% to Rs345.6cr (Rs274.1cr) on the back of forex gains

1HFY2008 numbers For 1HFY2008 TCL clocked a marginal 2.1% increase in consolidated Top-line to Rs2,863cr (Rs2,805cr) . However, TCL’s consolidated 1HFY2008 Bottom-line surged 26.1% to Rs345.6cr (Rs274.1cr). Consolidated Operating Margins for 1HFY2008 expanded by 100bp yoy to 18.8% (17.8%). Bottom-line moved up on forex gains following an appreciating Rupee to the tune of Rs86.3cr (loss of Rs11.6cr). Inorganic Chemicals Division: The company wintessed substantial yoy decline in consolidated EBIT Margins by 310bp to 13.7% (16.8%) in its Inorganic Chemicals Division primarily on the back of higher freight, power and raw material (coke) costs. Fertiliser Division: Consolidated EBIT Margins of the Fertiliser Division jumped by 440bp to 16.1% (11.7%) on the back of higher offtake. It may be noted that TCL’s FY2007 performance is not comparable with FY2006 because of the acquisition of 33% stake in IMACID in FY2005 and acquisition of Brunner Mond in FY2006.

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India Research Exhibit 10: Q2FY2008 Performance (Standalone)
Y/E March (Rs cr) Net Sales COGS Total Operating Expenditure EBITDA EBITDA Margin (%) Other Income Foreign exchange (Gain)/ Loss Depreciation Interest PBT PBT Margin (%) Total Tax % of PBT FBT PAT Exceptional items Adj. PAT PAT Margin (%)
Source: Company, Angel Research

Q2FY2008 Q2FY2007 %chg 1,255 728 1,046 209.2 16.7 44.3 8.8 36.7 1.1 206.9 16.5 63.3 30.6 1.0 142.6 0.0 142.6 11.0 1,126 11.5 611 19.2 929 12.6 197.2 6.1 17.5 68.2 (35.0) 4.6 93.0 36.5 0.7 3.2 (65.3) 221.2 (6.5) 19.6 62.1 2.0 28.1 1.5 (33.3) 157.7 (9.6) 0.0 157.7 (9.6) 13.2

1HFY2008 1HFY2007 1,924 955 1,552 372.4 19.4 56.4 (29.0) 73.4 1.4 383.0 19.9 117.3 30.6 2.0 263.7 0.0 263.7 13.3

%chg

1,881 2.3 904 5.6 1,525 1.8 355.8 4.7 18.9 73.6 (23.4) 20.8 (239.6) 73.0 0.6 3.9 (64.5) 331.7 15.5 17.6 96.2 21.9 29.0 2.5 (20.0) 233.0 13.2 0.0 233.0 13.2 11.9

Exhibit 11: Segment-wise Break-up (Standalone)
Y/E March (Rs cr) Inorganic Chemicals Fertilisers Total Segment EBIT Inorganic Chemicals % EBIT Fertilisers % EBIT Total % EBIT Less: Interest Other unallocated expenditure Total Total PBT % PBT
Source: Company, Angel Research

Q2FY2008 Q2FY2007 %chg 3,296 9,255 12,551 593 18.0 1,380 14.9 1,973 15.7 11 (107) (96) 2,069 16.5 3,617 7,643 11,260 (8.9) 21.1 11.5

1HFY2008 1HFY2007 6,828 12,412 19,241 1,506 22.1 1,909 15.4 3,415 17.8 (365) (50) (415) 3,830 19.9 7,346 11,460 18,807 1,828 24.9 1,359 11.9 3,187 16.9

%chg (7.1) 8.3 2.3 (17.6) 40.4 7.2

915 (35.2) 25.3 844 11.0 1,758 15.6 32 (65.3) (486) (77.9) (454) (78.8) 2,212 19.6 (6.5) 12.2 63.6

202 (281.0) (331) (129) 3,317 17.6 (85.0) 220.4 15.5

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India Research Exhibit 12: Q2FY2008 Performance (Consolidated)
Y/E March (Rs cr) Net Sales COGS Total operating expenditure EBITDA EBITDA Margin ( %) Other Income Foreign exchange (Gain)/ Loss Depreciation Interest PBT PBT Margin (%) Total Tax % of PBT FBT PAT Exceptional items Adj. PAT PAT Margin (%)
Source: Company, Angel Research

Q2FY2008 Q2FY2007 %chg 1,733 825 1,440 293.3 16.9 44.4 (45.1) 78.6 27.2 276.9 16.0 67.7 24.5 1.0 208.2 0.0 208.2 11.7 1,594 707 1,319 275.5 17.3 68.5 (35.1) (1.9) 65.4 26.8 253.7 15.9 66.6 26.3 1.5 (33.3) 185.5 0.0 185.5 11.2 12.2 12.2 1.6 20.2 1.5 9.2 8.7 16.7 9.2 6.5

1HFY2008 1HFY2007 2,863 1,123 2,324 538.6 18.8 56.5 (86.3) 155.3 52.8 473.3 16.5 125.7 26.6 2.0 345.6 0.0 345.6 11.8 2,805 1,100 2,307 498.5 17.8 74.1 11.6 129.0 49.5 382.5 13.6 105.9 27.7 2.5 274.1 0.0 274.1 9.5

%chg 2.1 2.1 0.8 8.0 (23.8) 20.4 6.6 23.7 18.7 (20.0) 26.1 26.1

Exhibit 13:Segment-wise Break-up (Consolidated)
Y/E March (Rs cr) Inorganic Chemicals Fertilisers Total Segment EBIT Inorganic Chemicals % EBIT Fertilisers % EBIT Total % EBIT Less: Interest Other unallocated expenditure Total Total PBT % PBT
Source: Company, Angel Research

Q2FY2008 Q2FY2007 %chg 718 1,015 1,733 67 9.3 173 17.1 240 13.9 27 (64) (37) 277 16.0 790 804 1,594 (9.1) 26.3 8.7

1HFY2008 1HFY2007 1,497 1,365 2,863 205 13.7 219 16.1 425 14.8 1,564 1,241 2,805 263 16.8 146 11.7 409 14.6 50 (23) 383 13.6

%chg (4.3) 10.0 2.1 (22.0) 50.5 3.9

148 (54.7) 18.7 86 102.3 10.7 233 14.6 27 (47) (20) 254 15.9 1.5 36.0 81.8 9.2 2.9

53 (101) (48) 473 16.5

6.6 340.6 23.7

27 (282.1)

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India Research Outlook and Valuation TCL has earmarked over Rs500cr for various expansions, which is expected to drive volumes going ahead. Ongoing expansions will be completed over the next couple of years in a phased manner and effects of the same will be fully reflected in the company’s FY2010E performance. We believe that the global prices of chemicals will remain strong and hence are positive for the company’s future growth prospects. The company has investments of over Rs36/ share (value as on March 2007 and inclusive of both quoted and unquoted investments). At the CMP of Rs303, the stock is available at 10.9x consolidated FY2008E EPS of Rs27.8 and 9.0x consolidated FY2009E EPS of Rs33.6. We Initiate Coverage on the stock, with a Buy recommendation and Target Price of Rs387.

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India Research Rs crore
FY2009E 7,071 10.9 2,333 5,765 1,306 18.5 97.5 300.4 86.9 0.0 1016 14.2 287.2 28.3 5.5 723 0.0 723 20.7 10.1 6,374 9.7 2,126 5,256 1119 17.5 102.5 290.9 83.6 3.7 843 13.0 239.0 28.3 5.0 599 0.0 599 17.9 9.2

Profit & Loss Statement (Consolidated)
Y/E March Net Sales % chg COGS Total operating expenditure EBITDA EBITDA Margin (%) Other Income Depreciation & Amortisation Interest Exceptional Items PBT PBT Margin (%) Total Tax % of PBT FBT PAT Extraordinary Items Adj. PAT % chg PAT Margin (%) 10.4 1,365 3,278 757 18.8 83.4 184.0 50.5 4.7 601 14.6 166.8 27.8 5.5 428 0.0 428 FY2006 4,034 FY2007 FY2008E 5,810 44.0 1,911 4,799 1,011 17.4 97.8 273.9 82.4 3.9 748 12.7 235.0 31.4 5.1 508 0.0 508 18.6 8.6

Balance Sheet (Consolidated)
Y/E March SOURCES OF FUNDS Equity Share Capital Reserves & Surplus Misc. exp. Shareholder's Funds Total Loans Deferred Tax Liab. Total Liabilities APPLICATION OF FUNDS Gross Block Less: Accu. Depreciation Net Block Capital Work-in-Progress Goodwill on consolidation Investments Deferred Tax Asset Current Assets Current Liabilities Net Current Assets Total Assets 4,846.2 2,625.7 2,220.5 558.9 707.5 547.5 93.6 1,853.0 1,594.2 258.8 4,386.8 5,782.3 2,955.8 2,826.4 229.6 763.2 775.3 57.6 2,014.3 1,921.7 92.6 4,744.7 6,256.9 3,246.7 3,010.2 105.0 763.2 775.3 57.6 2,237.6 1,892.3 345.4 5,056.6 215.2 2,004.2 7.0 2,212.3 1,827.7 346.8 4,386.8 215.2 2,356.7 3.7 2,568.1 1,864.2 312.4 4,744.7 215.2 2,729.1 0.0 2,944.3 1,800.0 312.4 5,056.6 FY2006 FY2007 FY2008E

Rs crore
FY2009E

215.2 3,175.2 0.0 3,390.4 1,400.0 312.4 5,102.7 6,586.9 3,547.1 3,039.8 55.0 763.2 775.3 57.6 2,487.5 2,075.6 411.9 5,102.7

Cash Flow Statement (Consolidated)
Y/E March Profit before Tax Depreciation Change in Working Capital Direct Taxes paid Cash Flow from Operations FY2006 600.7 184.0 (512.1) (193.3) 79.3 FY2007 FY2008E 748.1 273.9 182.8 (234.8) 970.0 606.7 363.3 227.8 0.0 36.5 (171.7) 37.7 (325.3) 38.0 116.5 154.5 843.0 290.9 (279.5) (244.0) 610.4 350.0 260.4 0.0 0.0 (64.2) (201.3) 0.0 (265.5) (5.1) 154.5 149.3

Rs crore
FY2009E 1015.7 300.4 (64.6) (292.7) 958.8 280.0 678.8 0.0 0.0 (400.0) (226.6) (7.3) (633.9) 44.9 149.3 194.3

Key Ratios
Y/E March Per Share Data (Rs) EPS Cash EPS DPS BookValue Operating Ratios (%) Raw Material / Net Sales (%) Inventory (days) Debtors (days) Debt / Equity (x) Return Ratios (%) RONW ROCE Dividend Payout Valuation Ratios (x) P/E (x) P/CashEPS (x) P/BV (x) EV/Total Sales (x) EV/EBITDA (x) 15.2 10.6 2.9 2.0 10.9 12.8 8.3 2.5 1.4 8.1 10.9 7.3 2.2 1.3 7.3 9.0 6.4 1.9 1.1 5.9 19.4 11.9 35.2 19.8 13.3 33.9 20.3 14.4 32.3 21.3 16.9 32.7 33.8 184.2 66.1 0.8 32.9 119.7 58.3 0.7 33.4 115.0 65.0 0.6 33.0 114.0 66.0 0.4 19.9 28.5 7.0 102.8 23.6 36.3 8.0 119.4 27.8 41.4 9.0 136.8 33.6 47.6 11.0 157.6 FY2006 FY2007 FY2008E FY2009E

Inc./ (Dec.) in Fixed Assets 1,179.7 Free Cash Flow Inc./ (Dec.) in Investments Issue of Equity Inc./(Dec.) in Loans Dividend paid (incl. tax) Other non-cash Exp/(Inc) (1,100.4) (410.4) 0.0 102.0 (158.9) 111.7

Cash Flow from Financing 465.2 Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances (635.2) 751.7 116.5

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Fund Management & Investment Advisory Ajay Jaiswal P. Phani Sekhar Prakarsh Gagdani Research Team Sarabjit Kour Nangra Hitesh Agrawal Vaishali Jajoo Harit Shah Rohit Nagraj Pawan Burde Girish Solanki Shailesh Kanani Surbhi Chawla Anand Shah Sulabh Agrawal Alpesh Mehta Puneet Bambha Amit Bagaria Akshat Vyas Reena Walia Neha Idnany Sandeep Wagle Ajit Joshi Milan Sanghvi Nitin Kunte Brijesh Ail Vaishnavi Jagtap Siddarth Bhamre Anisha Gupta Kalpesh Gohel Commodities Research Team Amar Singh Samson P Anuj Gupta Girish Patki Commodities Research Team (Fundamentals) Badruddin Harmit Virvadia Bharathi Shetty Bharat Patil

Investment Strategist (Kolkata) Fund Manager AVP - Investment Advisory ( 022 - 4040 3800 / 2835 9600) VP-Research, Pharmaceutical VP-Research, Cement, Media Automobile IT, Telecom Oil & Gas Metals & Mining Retail, Hotel, Mid-Cap Capital Goods Aviation, Shipping, Logistics FMCG Mid-cap Banking Power PMS Research Associate (Pharmaceutical) Research Associate (Retail, Hotel) Research Associate - (PMS) Chief Technical Analyst AVP Technical Advisory Services Sr. Technical Advisor Technical Advisor Technical Analyst Technical Analyst Fund Manager - Derivatives & Equities Analyst - (PMS) Associate (PMS) Research Head (Commodities) Sr. Technical Analyst Sr. Technical Analyst Sr. Technical Analyst Sr. Research Analyst (Agri) Sr. Research Analyst (Bullion) Research Editor Production

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Ratings (Returns)
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Buy > 15%,

Hold 5-15%,

Sell < - 10%
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Acme Plaza - Pankaj Mungre Tel: (022) 4000 3900 Fax: (022) 4000 3999

Branch Offices:
Andheri (Lokhandwala) - Muskaan Doultani Tel : (022) 2639 2626 / 3255 0987 Andheri (W) - Dinesh Nihalani Tel: (022) 2635 2345 / 6668 0021 Bandra (W) - Anit Hake Tel: (022) 2655 5560 / 70 Bandra (W) - Faruq Wakani Tel: (022) 6643 2694 - 99 Borivali (W) - Gyan P. Joshi Tel:(022) 2895 2600 / 1 / 2 Borivali (W) - Tarun Dhami Tel: (022) 3092 1969 / 2892 8890 Chembur - Rajesh Mehta Tel:(022) 6703 0210 / 11 /12 Fort - Pankaj V. Shah Tel: (022) 2263 4050-55 Ghatkopar (E) - Ashwin Thakkar Tel: (022) 6799 3185 - 88 / 2510 1525 Goregaon (W) - Sanjiv Dhami Tel: (022) 2878 9401 / 02 Kalbadevi - Viren Ved Tel: (022) 2243 5599 / 2242 5599 Kandivali (W) - Sachin Ghelani Tel: (022) 2867 3800 / 2867 7032 Kandivali (Thakur Village) - Akharam Chaudhary Tel: (022) 2846 1267 / 1654 / 2056 / 2076 Malad (E) - Satish Kanwarjani Tel: (022) 2880 4440 Malad (W) - Tushar Shah Tel: (022) 2880 0960 / 68 Mulund (W) - Niraj Anand Tel: (022) 2562 2282 Thane (W) - Diksha Khushalani / Rajesh Kumar Tel: (022) 2539 0786 / 0789 / 0796 Vashi - Punit Chopra Tel: (022) 2765 4749 / 2251 Vile Parle (W) - Manish Negandhi Tel: (022) 2610 2894 / 95 Ahmedabad (Bapu Nagar) - Milan Kanabar Tel : (079) 3026 0204 / 0205 Ahmedabad (C. G. Road) - Ritesh Patel Tel: (079) 4021 4023 Ahmedabad (Gurukul) - Kaivalya Shah Tel: (079) 6522 5510 / 3012 5492-94 Ahmedabad (Kalupur) - Jicky Thomas Tel: (079) 3240 7474 / 75 Ahmedabad (Maninagar) - Ashok Kumar Tel: (079) 3048 0241 / 0242 / 0245 Ahmedabad (Ramdevnagar) - Krunal Pandya Tel : (079) 2692 6401 / 51 Ahmedabad (Sabarmati) - Kaushik Rathi Tel : (079) 2692 6401 / 51 Ahmedabad (Satellite) - Rishi Parghi Tel: (079) 4000 1000 Ahmedabad (Shahibaug) - Chirag Raghvani Tel: (079) 22861053 / 5 / 6 Amreli - Nishith Hemani Tel: (02792) 228 800/231039-42 Anand - Pragnesh Pandya Tel : (02692) 267 041-45 Ankleshwar - Ankit Mathur Tel: (02646) 652 681-85 Baroda - Manthan/Rashmikant Tel: (0265) 6624 280 / 2226 103 Baroda (Akota) - Manisha Tandel Tel: (0265) 2355 258 / 3080 615 Bhavnagar - Apurva Dhami Tel: (0278) 2512099 / 755 / 3001717 / 18 Bhopal - Sandeep Kothana Tel :(0755) 3256 663 / 4024 000 Gandhinagar - Vivek Thakker Tel: (079) 4010 1010 - 31 Gondal - Lenin Trivedi Tel: (02825) 240 693 / 4 Himatnagar - Aasif Hirani Tel: (02772) 241 008 Indore - Alok Rathi Tel: (0731) 4042242 / 4044 366 / 4087 966 Jalgaon - Sandeep Mundra Tel: (0257) 3200 906 Jamnagar - Jwalant Shingala Tel : (0288) 266 4941-44, 3217 790 Jodhpur - Amit Kumbhat Tel: (0291) 5100 941 - 948 / 3208 354 Junagadh - Vishal Kanabar Tel : (0285) 2622 483 /2622 484 Kota - Sumit Maheshwari Tel : (0285) 2622 483 /2622 484 Mehsana - Alipt Doshi Tel: (02762) 645 291 / 92 Nadiad - Vipul Patel Tel : (0268) - 2527 230 / 31 Nashik - Nilesh Supekar Tel: (0253) 6611 201 / 206 New Delhi (Bhikaji Cama Place) - Sumit Bhuttan Tel: (011) 41659 711/12 New Delhi (Lawrence Rd.) - Surender Kumar Tel: (011) 3262 8699 / 8799 New Delhi (Pitampura) - Roopal Agarwal Tel: (011) 4700 2380 / 84 New Delhi (Preet Vihar) - Vipul Kaushik Tel: (011) 4242 1105 - 07 Palanpur - Paresh Patel Tel : (02742) 645 171 / 72 Patan - Shikha Saxena Tel: (02766) 222 306 Porbandar - Ketan Thanki Tel : (0286) 221 5310 / 31 / 221 5450 Pune - Iftikhar Chouhan Tel : (020) 6620 6591 / 6620 6595 Rajkot (202 Race Cource) Hitesh Rupareliya Tel : (0281) 2921 568, 99049 10001 Rajkot (University Rd.) - Prashant Ukani Tel : (0281) 2577408 Rajkot (Bhaktinagar) - Dhaval Dave Tel : (0280) 236 1935 / 329 6881 / 329 8100 Rajkot (Indira Circle) - Denish Patel Tel : (0281) 2585 751, 99258 84848 Rajkot (Orbit Plaza) - Hitesh Popat Tel: (0281) 2463 291-94 Rajkot (Star Chambers) - Manish Baradia Tel : (0281) 2233 230 / 50 Rajkot (Star Chambers) - Nilesh Vora Tel : (0281) 2225 401 / 02 / 03 Secunderabad - Srinivas Tel : (040) 6690 5192 / 3 / 4 Surat (Mahidharpura) - Sameet Kapadia Tel: 2402 911 - 915 Surat (Parle Point) - Akshay Panwala Tel : (0261) 2257 990 / 909 Surat (Ring Road) - Piyush Bothra Tel : (0261) 6696 666 Surendranagar - Prashant Jani Tel : (02752) 325905 / 223305 Udaipur - Anurag Jain Tel - 098870 60723 / 099291 04723 Valsad - Suchita Krishnani Tel - (02632) 645 344 / 45 Vapi - Jalpa Desai Tel: (0260) 2400 210 / 214 / 236 Vijayawada - Badrinath Majeti Tel :(0866) 6636900 / 901/ 902 / 903

Angel Broking Limited
Central Support & Registered Office:G-1, Akruti Trade Centre, Road No. 7, MIDC Marol, Andheri (E), Mumbai - 400 093 Tel : 2835 8800 / 3083 7700
Angel Broking Ltd : BSE Sebi Regn No : INB 010996539 / CDSL Regn No: IN - DP - CDSL - 234 - 2004 / PMS Regn Code: PM/INP000001546 Angel Capital & Debt Market Ltd: INB 231279838 / NSE FNO: INF 231279838 / NSE Member code -12798 Angel Commodities Broking (P) Ltd: MCX Member ID: 12685 / FMC Regn No: MCX / TCM / CORP / 0037 NCDEX : Member ID 00220 / FMC Regn No: NCDEX / TCM / CORP / 0302

November 21, 2007

For Private Circulation Only - Sebi Registration No : INB 010996539

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