Tata Chemicals can be a good bet at this point; here's why

Shares of Tata Chemicals have been under pressure for the last few days in a volatile market. The stock fell 4.36 percent to end at ₹921.50 on May 25 to extend the losses into the third consecutive session.

However, the fresh correction in the stock may be an opportunity for investors to buy it as brokerages are positive about the stock.

Tata Chemicals produces sodium bicarbonate and soda ash for a variety of sectors, including glass, detergents, silicates, textiles, food, pharmaceuticals, animal feed, mining, and chemical processing. Brokerage firms point out that the company also deals in providing nutrition solutions for human and animal health and agricultural solutions to improve farm yield and income.

It has a wide market reach. Brokerage firm Anand Rathi Share and Stock Brokers underscored that the company has a presence across four continents, employing nearly 5,000 people with 13 manufacturing units and three research centres.

Anand Rathi has a 'buy' call on the stock with a target price of ₹1,170 as it believes that the Indian chemical industry has a structural and locational advantage to rapidly grow from its current size of $178 billion to $300 billion over the next five to seven years.

In addition to India’s demographic dividends, the country has one of the lowest per capita consumption of chemicals, offering adequate headroom for the sector to grow. Basic chemistry products such as alkali chemicals are the primary growth drivers for inorganic chemicals having a stable outlook.

"The government aims to transform India into a manufacturing hub for crop-protection chemicals. The sector is expected to grow more than 9 percent over the next five years," Anand Rathi underscored.

The brokerage firm believes Tata Chem will grow its revenue by 13 percent CAGR over the next two years - driven by capacity expansion and recovery in economic activities.

It also believes the company will maintain its profit margin with a focus on cost reduction, maximizing plant output and reduction of international debt.

On the front of valuation, the stock is trading at 19.6 times its FY22 earnings and 17.4 times its FY23E earnings, said Anand Rathi.

The company, on April 29, reported a multi-fold jump in consolidated profit after tax at ₹470.24 crore for Q4FY22 against ₹29.26 crore in the corresponding quarter a year ago. Consolidated revenue from operations grew 32 percent year-on-year (YoY) to ₹3,480.67 crore against ₹2,636.21 crore in the same quarter last year.

Brokerage firm Nirmal Bang has a 'buy' call on the stock with a target price of ₹1,146 and said that its bullish view is based on the management’s guidance about sustained pricing/margin expansion potential after the latest hikes in US/UK soda ash contract prices and Indian list price.

Motilal Oswal Financial Services has a 'neutral' call on the stock with a target price of ₹1,045. Considering the strong operating performance in Q4FY22, Motilal Oswal raised its FY23/FY24 EBITDA estimate for the company by 5 percent each. The brokerage firm expects a revenue, EBITDA, and PAT CAGR of 14 percent, 13 percent and 6 percent, respectively, over FY22-24.

Tata chemical has been one of the best-performing stocks in the large cap space in the last two months. The company announced very good quarterly results and post the announcement stock has been showing resilience against the market weakness.

Technical view

"Technically, the stock is holding above its long term moving averages and relative strength is high. However, in the short term, momentum is missing and stock is expected to consolidate in the range of ₹900-1000. For a one-year timeframe, investors can utilize a lower band of the support of ₹900 to start accumulating the stock in two-three tranches," said Vinay Rajani, CMT, Senior Technical & Derivative Analyst, HDFC Securities.

"The current price to earnings ratio is 19.66 against a sector PE of 15.43. With a market cap of ₹24,722 crore, the price to book value ratio is 1.27, giving support on the downside from a valuation standpoint. The chemical sectors and stocks may benefit from supply chain disruptions in China. We recommend buying stock around ₹920 with a stop loss of ₹800 with a target price of ₹1,100 in the next 12-15 months," said Naveen Mishra, an analyst at CapitalVia Global Research.

Disclaimer: The views and recommendations made above are those of broking companies and not of MintGenie.