Shares of Tata Chemicals slipped 7 per cent to Rs 927.5 in Tuesday’s intra-day trade, amid heavy volumes, after the company announced 3-4 per cent price cuts across India for light and dense soda ash effective from April 17, 2023.
At 10:41 am; Tata Chemicals quoted 6 per cent lower at Rs 935, as against 0.1 per cent decline in the S&P BSE Sensex. The average trading volumes on the counter jumped over eight-fold, as around 3.2 million equity shares changed hands on the NSE and BSE.
Tata Chemicals is the world's third-largest producer of soda ash, with a global capacity of 4.137 million tonnes per annum, or 4.353 million tonnes, including sodium bicarbonate, with manufacturing operations spread across India, US, UK and Kenya.
The cut comes amid falling soda ash prices in China since mid-March, as the market reacts to unexpected news of substantial capacity addition in Inner Mongolia from May 2023. Analysts at Kotak Institutional Equities see this as an incremental negative for soda ash prices, though uncertainties remain around demand and supply and will need monitoring.
However, the brokerage firm continues to expect Q4FY23 earnings to be strong due to upward revisions in US domestic contract prices for CY2023 and firm realisations on US exports. The downtrend in energy costs is also a positive for the Indian business.
However, the outlook for H2CY23 is less clear, given slowing demand from construction and automotive sectors in the US and the influx of additional capacities from China and the US. Soda ash bulls do highlight that large expected additions of solar glass capacities in China and India as a key long-term demand driver, but whether this will absorb all the fresh capacity expected to hit the market in CY2023 is unclear.
“We leave 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,” analysts said.
Meanwhile, Tata Chemicals saw EBITDA margins improve to 23 per cent in the first nine months (April to December) of the financial year 2022-23 (9MFY23) from average Fitch-adjusted margin of 17 per cent over FY19-FY22.
Analysts at Fitch Ratings believe this was due to rising demand, tight industry conditions, which drove higher prices and benefits from well-managed energy costs.
However, the rating agency expect margins to narrow from FY24 due to risks to growth in the US and UK markets, more balanced industry conditions over the medium term and as current hedging benefits subside. Fitch Ratings assume EBITDA margins of 16 per cent-17 per cent over FY24-FY26.
"The tight demand-supply conditions in the global soda ash industry to become more balanced over the next few years, as capacity expansion plans by industry players, which were pushed back during the pandemic, are revived, idled capacity restarted and near-term global demand faces risks. We expect this to drive a moderation in soda ash prices over FY24-FY25 after the sharp increase in FY23," the rating agency added.
