Tata’s Chemical Stock Logs Bearish Week Over Tata Sons IPO Doubt, But Rises 16% Month-On-Month; BUY OR SELL?

The leading soda ash production company is expected to unlock massive value if Tata Sons ever decides to go public. However, the possibility of that happening is uncertain, and Tata Chemicals recorded a sharp correction.

On March 15, Tata Chemicals’ share price ended at Rs 1,128.10 apiece, down by 0.53% with a market cap of Rs 28,739.06 crore on BSE. In the trading week from March 11-15, the stock fell by nearly 7%. However, it needs to be noted that the stock has recovered early-weekly double-digit falls.

Before the bears appeared, Tata Chemicals had seen a significant rally of nearly 44% from February 29th to March 7th, with the salt company also hitting its new 52-week high of Rs 1,349.70 apiece. This bull trend was due to reports that stated Tata Sons could unlock a market value of Rs 11 crore, after possibly launching Rs 55,000 crore worth of IPO, the highest so far on the Indian IPO market.

However, by the time this week arrived, reports also said Tata Sons is looking at plans to avoid an IPO launch.

The reason why the majority expect Tata Sons to list in the first place is due to a regulation of the Reserve Bank of India (RBI). In September 2023, RBI released yet another list of NBFCs in the Upper Layer under Scale Based Regulation for NBFCs for the year 2023-24. Hence, Tata Sons is required to be listed and the expectation is that the market debut will take place in September 2025.

This week, due to uncertainty on Tata Sons IPO, Tata Chemicals shed over 16% instantly between March 11-13 but saw some comfort on March 14 with an upside of 3.4% on BSE, however, could not recover the early losses and ended the week with a drop of 6.6% on the exchange.

But Tata Chemicals has still given notable gains both in the long-term and short-term. Thanks to the earlier buzz on Tata Sons, Tata Chemicals’ share is broadly stable so far in 2024.

In a month, Tata Chemicals is still up by 16%, while its six-monthly performance is over 6.64% upside, and year-to-date, the stock is up by 1%. 1-year performance is a surge of nearly 18%. Tata Chemicals is still a multi-bagger with its 5-year performance with an upside of 340%.

Why does Tata Sons IPO matter to Tata Chemicals?

According to the research note of Vidit Shah, Research Analyst at Spark Capital, four (Tata Motors, Tata Chemicals, Tata Power and Indian Hotels) companies within the Tata Group hold ownership in Tata Sons. However, the only realistic way to get exposure to the potential value unlocking (of Tata Sons’ stake) is via Tata Chemicals wherein the ownership of Tata Sons potentially amounts to ~80% of the company’s market capitalisation. The stake is worth ~16-21% of the market capitalisation for the other three companies.

Shah’s note added, “We calculate the intrinsic valuation of Tata Chemicals to be ~11x FY25 PE (calculated using Bloomberg earnings estimates). Given, the commodity nature of the Soda Ash and the potential headwinds faced by the industry due to falling realisations, the valuations have been suppressed. We also note that should the street assign a ~Rs 10-11 lac crore valuation to Tata Sons, the intrinsic valuation of the listed Tata Chemicals business is ~5-7x FY25 PE, which could potentially re-rate should the investment be liquidated at/or post IPO.”

While there is still doubt on whether Tata Sons will launch its IPO or not, what should investors expect in Tata Chemicals stock ahead?

BUY OR SELL Tata Chemicals Stock?

In its research note dated March 11, Kotak Institutional Equities said, “recent news reports that state Tata Sons is evaluating options to avoid an IPO should deflate speculation around value-unlocking at Tata Chemicals (TCL). Our SoTP-based Fair Value for TCL remains Rs780, and we continue to expect EPS to fall by about two-thirds over FY2023-25E amid falling margins on soda ash. The recent speculative flare-up in the stock should be considered an exit opportunity, in our view.”

Soda Ash Business Under Pressure:

Kotak’s note highlighted that import prices of soda ash into India remain at low levels as of February 2024, having nearly halved from the levels of August 2022 (Exhibit 1). US export prices, too, have corrected c.20% off their peak (exhibit 2). 3QFY24 EPS was only Rs6.2, albeit partly due to one-off production disruptions in the US and UK; the outlook for 4QFY23 seems weak, as the full impact of renegotiation of annual contracts in the US domestic business and the UK starts to flow through TCL’s financials.

Accordingly, Kotak’s note added, “Our FY2025E EPS of Rs32.4 is below consensus, and we think there may be further downside risk to our estimates if global demand does not pick up in 2HFY25. Management has pointed at ‘bearish’ customer sentiment and suggested that a recovery will take 12-18 months. The influx of new capacities, particularly in China, is a key cause for concern.”

No Clear Path To Unlock Value From Holding Tata Sons’ stake:

Based on news reports, Tata Sons does not seem inclined to go public. It is believed to have first approached the RBI for an exemption from the ‘upper-layer NBFC’ rules, and when that seemed unlikely, it moved on to consider various options to reorganize itself to sidestep the rules. Given this scenario, Kotak’s note said, “The probability of an IPO should be considered low.”

In the absence of an IPO, there is no clear or easy path for TCL to unlock value from its 2.5% stake in Tata Sons. Kotak further said, “Indeed, TCL has held the stake for more than 25 years without any visible attempt by the Tata Group to execute a buyback. The equity markets, too, assigned little or no value to the stake all these years, given the lack of clarity around its monetization. For these reasons, we think a stake sale should be treated only as an optionality rather than as part of the core valuation of TCL’s stock.”

On the valuation, Kotak’s note added, “We continue to expect EPS to fall by about two-thirds over FY2023-25E amid falling margins on soda ash. The recent speculative flare-up in the stock should be considered an exit opportunity, in our view.” Kotak has a target price of Rs 780 on Tata Chemicals.

Tata Chemicals Weekly Outlook:

On the other hand, as per Equity Pandit page, Tata Chemicals trading outlook for March 18-22 is that on the positive side, immediate resistance will be seen at 1,208.00. Closing above 1,208.00, Tata Chemicals share price will see a sharp breakout. Major resistance for Tata Chemicals share price will be seen at 1,287.25 for the week. Trading range for Tata Chemicals share price for this week should be between 919.00 on down side and 1,352.50 on up side.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author or Greynium Information Technologies. The author, the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.