This chemicals stock has been rising on the bourses after reporting a 45% YoY increase in net profit to Rs 381 crore in Q1FY23. The company’s revenue increased 49% YoY in the quarter. Profits beat Trendlyne’s Forecaster estimates by 44%. Despite high commodity prices since the start of the year, Tata Chemicals has managed to navigate around it and report decent growth in EBITDA and margins. The company attributes the increase in EBITDA margin by 520 bps YoY to better realizations in both domestic and export markets which helped reduce the impact of increasing raw material and energy costs.

According to the management, realizations in India were mainly driven by the soda ash business, which saw an increase in demand from detergent, glass and other sectors. Soda ash - which falls under basic chemistry products, contributes 94% to Tata Chemicals’ total revenues.

The soda ash cycle turns positive for Tata Chemicals

The management is happy about the demand being on the higher side, and back to pre-Covid levels for soda-ash. They expect demand to sustain and grow further not just from the detergent and glass industries but also see demand coming in from the solar glass segment as well. Another market where demand is rising is in the lithium carbonate segment used in making Li-ion batteries.

Despite the positive outlook on the soda-ash cycle, the management remains cautious about tight supply conditions. According to Nirmal Bang, management has concerns over cost inflation surging in the next two quarters, and this is likely to hit the US and UK markets because of high energy prices there. However, Tata Chemicals has maintained its soda ash volume sales, with the Kenya market performing better than the UK market.

US, UK may face challenges because of a shift in energy prices, affecting exports

Indian soda ash exports fell in Q1FY23. But India has overall been a net importer of soda ash. However, it needs to up its volumes to meet the increase in domestic demand from various industries.

US export volumes fell in Q1 because of a maintenance shutdown in one dryer. It led to a production loss of 10,000 MT. However, the US is one of the largest exporters and continues to cater to the export demand of other countries. The Kenya market also performed well with higher sales volumes and exports. The management says the Kenya market is one of its lowest-cost units and any movement in market price disproportionately benefits margins.

The management mentions significant changes made for its US markets to meet demand and improve production and sales volumes. In the earnings call, the management says that they have changed their contracts to a quarterly basis now. These numbers would reflect in consecutive quarters once they start getting fulfilled.

Gas prices have been playing havoc and continue to be on the higher end. This problem reflects in the US, UK and European markets. Chemical sector companies including Tata Chemicals expect pricing and demand stress to be first felt in European markets in the coming quarters. With the news of European markets heading towards recession along with skyrocketing gas prices, demand is expected to be hit.

However, this shouldn’t affect pricing much as the company hedges their forward pricing, and any shift in energy prices will also shift the prices, with this factor built into their contracts. The company also hedges in the US markets to protect costs from spiking up too much. Given the market scenario, the company sees export prices continuing to remain strong and above pre-Covid levels in FY23.

So far so good for Tata Chemicals

Despite high input costs and economic disruptions, soda ash demand is rising in markets across the world. The management although cautious remains positive about the growing demand. While the management is a little wary about the sustenance of the demand, it expects any downside to not be more than 6-7%.

Trendlyne’s Forecaster data also suggests that revenue will increase in Q2FY23 but may slightly fall in Q3FY23.

However, according to Nirmal Bang, Motilal Oswal and Geojit BNP Paribas, soda ash demand is likely to remain robust for another 18-24 months. Nirmal Bang expects demand/supply percentage to remain around 90% (in terms of volumes) until CY24, but the industry may slow down after CY23. There are some headwinds related to inflation and high-interest rates, that may affect sectors like auto, hospitality and construction. However, in the current trend, these sectors are booming and it will be interesting to see how long it sustains.

On a positive note, with the single-use plastic ban, there may be an increase in demand for glass, especially for milk packaging. This means an additional segment where the demand for soda ash may come in.

As of now, the Tata Chemicals MD, R Mukundan, says that the capex plans are progressing well. He also adds that they expect their capex plans to be on schedule for FY24, for increasing volume capacities for salt, and soda ash.