Tata Chemicals: A great bet for those seeking value picks

Buy Tata Chemicals, the soda ash and fertilisers maker, and get its salt business and investments in Tata Steel, Indian Hotels, Tata Motors and others for free.

Investors do not seem to be factoring in the earnings potential and the value of its branded salt business and investment holdings into its current value , which is at Rs 9,000 crore. Tata Chemicals, the world's biggest soda ash maker, has an upside potential of about 40% if one takes the fair value of its businesses and investments into account, an ET Intelligence Group's analysis shows.

About 93% of the company's revenues and 85% of EBIDTA come from the chemicals and fertiliser businesses . Investors value the company based on the performance of these units, but the branded salt business, which enjoys a near monopoly and contributes only 7% of revenues, provides upside potential. The company sells Tata Salt and I-Shaki , which together control over two-thirds of India's branded salt market.

Last fiscal, the salt business sales rose 24% to Rs 958 crore and its EBIT was about Rs 300 crore; its net profit could be about Rs 220 crore. If one accords even a lower price-toearnings multiple of 30 - consumer goods peers such as HUL, GSK Consumer Healthcare and Nestle trade between 40 and 45 times earnings - the valuation of the salt business alone comes to about Rs 6,600 crore.

Less competition helps it enjoy an operating margin of 30%, much higher than most consumer goods makers. Its investments in Tata Steel, Tata Motors, Titan, Tata Global Beverages, Indian Hotels and Tata Investment Corp is icing on the cake. The market value of these investments is about Rs 1,400 crore; even if a 20% discount is provided, it can still be valued at Rs 1,100 crore. The remaining business made a profit after tax of over Rs 720 crore in the last one year; it can be value at Rs 7,200 crore even with a moderate PE multiple of 10.

The stock's underperformance is due to the lacklustre performance of the chemicals and fertiliser industry and concerns over the company's high debt accumulated during its takeover drive. But its debt has been gradually coming down.

The company can be valued at Rs 14,900 crore - adding the Rs 6,600-crore value of the branded salt business to the Rs 7,200 crore of the chemical and fertilizer business, and taking into account its investments worth Rs 1,100 crore. With early signs of a bull market visible, investors are likely to hunt for value bets. Tata Chemicals could be one of them.