Shares of Tata Chemicals tanked nearly 6.5% to ₹927 apiece on the BSE during Tuesday's intraday trade. This came after the company announced a reduction in the prices of light and dense soda ash by 3–4% across India, effective Monday.
While the price of sodium bicarbonate has not been revised, the price of salt, which is another important product for TCL, is completely independent.
The cut comes amid falling soda ash prices in China since mid-March as the market reacts to the unexpected news of substantial capacity addition in Inner Mongolia from May 2023.
Tata Chemicals, part of the Tata Group, is one of the global leaders in soda ash and sodium bicarbonate with manufacturing facilities in India, US, UK and Kenya. The company is the pioneer and market leader in India's branded Iodized salt segment.
Soda ash is used in a wide range of products, such as powdered detergents, glass manufacturing, soaps, and rechargeable batteries, as well as used extensively in metallurgical processes and across the food, cosmetic, and pharmaceutical industries.
Domestic brokerage firm Kotak Institutional Equities estimates that the India soda ash business accounts for 15-20% of TCL’s consolidated EBITDA.
The price cuts should at least partially be mitigated by the lower coal prices. Besides, prices have risen in the North American region, which contributes nearly a third of consolidated EBITDA.
Though these factors should cushion the near-term impact of price cuts on consolidated earnings, the medium-term risk is that the market softness reflected in these cuts spreads to other regions, particularly exports out of the US and Kenya, it said.
The capacity expansion in China’s Inner Mongolia region by Yuan Xing Energy was expected to come on stream much later. Until recently, industry participants have been indicating that the timing and size of expansion there is uncertain.
However, the latest news on this front is that the plant is now expected to commence operations next month (May 2023), with a starting capacity of 1.5 million tons per annum that will gradually ramp up to 5 million tons per annum by the end of CY2023, according to the brokerage.
Although these numbers are ambitious, their credibility remains unverified. The recent price action in China indicates concerns about local oversupply, it noted.
Amid this, the brokerage expects strong 4QFY23 earnings for Tata Chemicals, due to upward revisions of US domestic contract prices and firm realizations on US exports, while the downtrend in energy costs also bodes well for India's business.
However, with slowing demand from the construction and automotive sectors in the US and an influx of additional capacities from China and the US, the outlook for 2HCY23 is less clear, it stated.
"We leave our estimates unchanged for now, pending further concrete information about Chinese expansion activities; if new capacities come on stream as projected, this could pose a risk," said Kotak Institutional Equities.
7 analysts polled by MintGenie on average have a 'buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
