Financial Analysis of

Tata Chemicals
Chemicals and Fertilizer Industry

Instructor
Prof. Padmini Srinivasan
Submitted by
Ankit Chowdhary - 1511380
Pulkit Aggarwal - 1511423
Rajkumar Chandrasekaran 1511426
Sandip Datta - 1511430

INTRODUCTION

Tata Chemicals Limited is a public limited company domiciled in India. Its shares are listed on two stock
exchanges in India - BSE & NSE. The company has a global presence with key subsidiaries in UK, Kenya and
USA are engaged in the manufacture and sale of soda ash, industrial salt and related products. Tata Chemicals is
the worlds 2nd largest producer of soda ash and largest in India. It is headquartered in Mumbai, India.
BUSINESS SUMMARY

Tata Chemicals is a global company with a range of business interests focusing on three sectors - living
essentials, industry essentials and farm essentials. It exports to
markets in Europe, Africa, South East Asia and the Middle
East.Tata Chemicals is the pioneer and market leader in Indias
branded iodised salt & soda ash segments. With the
introduction of an innovative, low-cost, nanotechnology-based
water purifier, it is providing affordable, safe drinking water to
the masses. With its farm essentials portfolio the company has
carved a niche in India as a crop nutrients provider. It is a
leading manufacturer of urea and phosphatic fertilisers and,
through its subsidiary, Rallis, has a strong position in the crop
protection business.
MARKET PROFILE

Chemical industry is one of the oldest domestic industry in

India which started working soon after the Indian
TATA Chemicals and its subsidiaries
independence. However, it saw a major turnaround in 1991
after the Indian economy opened to globalization. The size of
the Indian chemical industry was approximately US$ 83 billion
in FY10, and could grow at 15% annually to US$ 330 billion in 2020 in the most likely scenario, outpacing the
GDP growth rate. The growth is expected to be driven by rising demand in end-use segments and rising exports
fuelled by increasing export competitiveness.
STRATEGY OF TATA CHEMICALS

Through LEAP, Tata Chemicals aspires to be a sustainable company with deep customer insights and
engaging relationships with all stakeholders in industrial chemicals, branded agricultural and consumer products
aiming to triple market capitalization by 2020. The company is looking at positioning itself less as a chemicals
company and more as a holistic provider of products and services that are based on science. The food and
nourishment platform and the farm input platform have been identified as two key pillars for growth. These will
primarily be based in India, but there is an export potential for the farm input business, especially in Africa,
South East Asia and Latin America wherein Tata Chemicals will work closely with Tata International.
In the soda-ash business, Tata Chemicals aims to address the cost competitiveness issue in the UK and
Kenya. Through investments in enlarging the product portfolio to include higher value-added products such as
sodium bicarbonate. Tata Chemicals intend to intensify their investments in the high-value fertilizers business

by investing INR 5 billion over the next two years. They will also increase their investments in high-tech
products such as specialty fertilizers, herbicides, weedicides and high grade seeds.
ACCOUNTING ANALYSIS
Particulars
Basis of
accounting &
preparation
of financial
statements

Revenue
recognition

Other income

Research and
Development
expenses

Finance costs

Foreign
currency
transactions
and

FY15
The financial statements of the
Company have been prepared in
accordance with the Generally Accepted
Accounting
Principles in India (Indian GAAP) to
comply with the Accounting Standards
specified under section 133 of the
Companies Act, 2013. The implication
on dividend payment is that, dividend
cannot be paid by a company from its
reserves other than free reserves.
Revenue from Sale of Goods is
recognised, net of returns including
estimated returns where applicable, and
trade discounts, rebates, sales tax and
value added tax, when all significant
risks and rewards of ownership of the
goods have been passed to the buyer,
usually on delivery of goods.
Interest income is recognised on a time
proportion basis taking into account the
amount outstanding and the rate
applicable.
Research expenditure is charged to the
Statement of Profit and Loss.
Development costs of products are also
charged to the Statement of Profit and
Loss unless a products technical
feasibility has been established

Fees and other transaction costs

incurred on origination of the loan are
amortised over the tenure of the loan on
a straight-line basis.
Non-monetary items which are carried
in terms of historical cost denominated in
a foreign currency are reported using the

FY14
The financial statements of the
Company have been prepared
in accordance with the
Generally Accepted
Accounting Principles
in India (Indian GAAP) to
comply with the Accounting
Standards notified under
Section 211(3C) of Companies
Act, 1956

FY13
Same as
2013-14

Sales are recognised, net of

returns including estimated
returns where applicable, and
trade discounts, Sales Tax and
Value Added Tax, on dispatch
of goods to customers.

Same as
2013-14

Interest income is accounted

on accrual basis.

Same as
2013-14

Revenue expenditure
pertaining to research and
development is charged to the
Statement of Profit and Loss.
Research expenditure has been
mistakenly represented as
revenue expenditure. No
information on development
costs provided.
No information provided on
amortisation of fees and
transaction costs.

Same as
2013-14

Foreign currency monetary

assets and liabilities of the
company and its net investment

Same as
2013-14

translations

exchange rate at the date of the

transaction.

in non-integral foreign
operations as at the Balance
Sheet date

CASH FLOW ANALYSIS

Net Cash Flow FY12 - FY15

Operating Activities
Financing Activities

Free cash flow: Net cash flow from operations is less than the sum of net profit and depreciation
for FY15. This shows that the profits have not been fully realized into cash because of accruals. But for the
previous years including FY14 & FY13, the value has been positive. In FY15, the increased inventory
has skewed the value. With better inventory management for the ensuing year, the company should be fine.

Current liabilities are amounting to 3814.42 crores, whereas cash and bank balance is 574.30
crores. Trade receivables and Inventories have a high percentage of cash locked in (2486.32 crores and
1809.03 crores respectively). This is evident from the high Turnover ratios (an industry characteristic).

The firms internal cash flow from operating activities is positive to the tune of 343.71 crores,
indicating a healthy business. But, in comparison to the previous year, it has come down from 1440.69
crores. The major reason is that of high inventory held up by the firm.
FY 2014
FY 2015
1440.69
Net cash from Operating Activities
343.71
Inventories

810.56

1809.03

The quality of income ratio (cash flow from operations/ net income) is calculated to be 0.54,
which is less than 1, indicating that the quality of income for the financial year 2014-15 hasnt been good.
The company has been highly involved in investments as per the Cash Flow Statement but this
cannot be seen in the Current Investments part of the Balance Sheet. This is so because the company has
adopted a policy of investing for short periods of time (less than 1 year). This can be seen from the sale and
purchase values of current investments.

FY 2013

Investing Activities

Purchase of Current Investments

Sale of Current Investments

9552.76

9552.78

FY 2014

10329.00

10329.03

FY 2015

19296.93

19298.20

We could say that as soon as the company sees an opportunity to make even the smallest of profits, it sells
the investment. That is, the company does not keep any open position in current investments.

SOLVENCY ANALYSIS

Solvency ratios measure the companys ability to pay its debts in the long run and hence are a measure of
companys future performance.
1. Debt to Equity Ratio
0.49

0.48

0.48

Debt to equity ratio is the ratio between total loans, i.e. short term and long
term borrowings, to shareholders equity. Excessive debt financing is risky for the company. The debt to
equity ratio is fairly constant over the three years and is close to 0.5. So the lower debt equity ratio
suggests that the creditors have less leverage and the company has a strong equity position.
FY'13

FY'14

FY'15

1.09

0.95

2.

Liabilities to equity ratio

Liabilities to equity ratio is the ratio between all liabilities to shareholders equity. It is a measure of
firms dependence on liabilities as a proportion of equity. Tata Chemicals liabilities to equity ratios
decreased from 1.09 to 0.95 due to an increase in equity and decrease in liabilities from FY13 to FY14.
So the risk associated with liabilities have decreased over the years. This is in sync with the industry
trends.
FY'13

FY'14

3. Interest Cover

0.96

FY'15

FY'13

FY'14

FY'15

Interest cover measures if the company has sufficient income to cover its
interest requirements, i.e. how easily a company can pay interest on outstanding debt. Tata Chemicals
Interest Cover depreciated from 5.89 to 5.24 because of more than 200 crore drop in profits (before
interest and tax). However there were some good signs in FY15 as interest cover increased to 5.57 due
to increase in profits (before interest and tax). The company has a higher interest cover ratio as
compared to the industry average of 1.58 in FY14. This indicates that the company is in a better
position to pay back interest expenses.
HORIZONTAL ANALYSIS

1. Inventories
The inventories as of FY15 increased by about 998 crore from 810 crore to 1809 crore, i.e. an increase
of about 123% due to increase in stock of traded goods-DAP and MOP (74.89 crore to 140.88) and
finished goods-NPK and NP products (96.75 crore to 155.10 crore).
2. Short Term Borrowing
The short term borrowings increased from 256.86 crores to 1384.14 crores in FY13, i.e. an increase of
about 438%. This is due to an increase in loans against government subsidy receivables (zero to 179.63
crores) and increase in unsecured bank loans (247.93 crores to 1196.10 crores).
3. Other Non-Current Assets
Other non-current Assets increased from 2.78 crores to 22.89 crores, i.e. an increase of about 723%. This
is due to increase in unamortized cost on borrowings.
4. Other Current Assets
Other current Assets increased from 19.82 crores to 58.04 crores, i.e. an increase of about 192%. This is
due to increase in income accrued on investments, Claims receivables and some other current assets.
5. Trade Receivable
The Trade Receivables increased from 1490.45 crores in 2012 to 2484.88 crores in FY13, i.e. an
increase of about 66%. This is due to increase in subsidy receivable from the Government
6. Other Long Term Liabilities
Other long term liabilities dropped from 84.91 crores in 2013 to 3.6 crores in FY14. This is because
firstly, there were no long term trade payables (35.25 crores in 2013) in FY14 and secondly because the
security deposits in long term in 2013 of 40.54 crores were moved to current liabilities in FY14.
7. Other Current Liabilities
Other Current Liabilities of 1492.39 crores in FY13 reduced to 431.18 crores in FY14. A change of
71.11% is seen due to very high external commercial borrowings in 2013 (of 1019.26 crores). But in
FY14 these are considered as long term borrowings.

LIQUIDITY RATIOS

The various liquidity ratios basically determines the current position of a company which speaks about its shortterm or current obligations.
1. Current Ratio
1.29

1.34

1.10

The current ratio of Tata Chemicals has been constantly increasing in the last three
financial years from a value of 1.10 in FY13 to 1.34 in FY15. The current assets has increased by about 30%
in the current year with respect to FY13 whereas the current liabilities increased by a small margin of 12.5%.
The short term borrowings and provisions have increased significantly in the last three years leading to the
increase in current liabilities. The trade payables has also increased by a whopping figure of INR 650 crores
from FY14. Trade receivables and inventories have increased by a big margin of 67% and 44% respectively
giving rise to the increase in current assets. Another interesting point to be noted is that the rate of increase in
the current ratio was much higher in FY14 (17.69%) compared to that in FY15 (22.20%) with respect to the
base financial year of FY13 because of increase in the inventories in FY14 owing to the launch of new
product in Potash 20:20:0:13. However, the current ratio of Tata Chemicals is less than 2 which reflects poorly
on the financial health of the company. The industry average for the current financial year is 1.32 and Tata
Chemicals is above the industry average.
Current Ratio

2. Quick Ratio
1.05
0.88

0.86

The quick ratio of Tata Chemicals has decreased from the base financial year FY13
by 2.28% which shows that the company is not in a good position as the ratio is below the ideal case ratio of
1:1. Although the overall assets less inventories has increased by over 24%, the increase was not sufficient to
bring the quick ratio over 1 as the current liabilities has also increased by over 12%. A striking point to observe
here is that the quick ratio had increased by 19.1% in FY14 compared to FY13 owing to increase in the
current assets less inventories by 46%. The cash and bank balance has also reduced in FY15 because of the
setting up of the new innovation centre in Pune. Tata Chemicals is below the industry average of 0.98.
Quick Ratio

3. Average Collection Period

102.75
85.05

88.48

The average collection period or the days sales outstanding (DSO) should be
as low as possible as this speaks in favour of the companys credit policy. It can be seen that the average
collection period has increased slightly by 4.03% over the period of the three years. The spike in FY14 can be
attributed to the fact that the trade receivables had increased by a huge margin leading to an increase in the
collection period. The industry average is 106.10 days which is quite high in comparison to Tata Chemicals
period of 88.48 days.
Average Collection Period

4. Average Inventory Holding Period

57.86

57.40
44.68

The average inventory holding period has almost remained constant between
FY13 and FY15. However, there is a drop (22.16%) in the average inventory holding period in FY14. This
can be directly related to the inventory turnover ratio change in FY14 because of the launch of a new product
in Potash 20:20:0:13. The industry average (44.46 days) is lower in comparison to Tata Chemicals average of
57.86 days.
Average Inventory Holding Period

5. Operating Cycle
147.43

146.34

142.46

Operating Cycle
The operating cycle includes the total time involved in the conversion of
inventories into cash and the average collection period of receivables. For Tata Chemicals, the operating cycle
has increased by a small margin of only 2.72% from FY13. The increase was, however, more in FY14 (3.49%)
from FY13. The industry average in this case is 150.56 days.

PROFITABILITY RATIOS

Profitability ratios help in understanding the operation success and asset utilization of a company.
9.13%
7.36%
6.21%

1.

Profit Margin
There has been gradual decline in profit margin since 2013. Decline between FY13 and FY14 can be
attributed to higher expenses in terms of cost of materials consumed, changes in inventories,
depreciation expenses and exceptional items. But noticeably profit has declined between FY14 and
FY15 in spite of rise in revenue from sales, positive change in inventories and zero exceptional items.
This is due to increment in cost of materials consumed, purchases of stock-in-trade and other expenses
like packing materials consumed, power & fuel, and sales & promotion expenses.
Profit M argin

7.42%
5.54%

2.

5.88%

Return on Assets
Return on Asset
It is a measure of profitability from a given level of investment, an excellent indicator of companys
overall performance. Unfortunately there has been decline, owing to decrease in profits coupled with
small increase in assets. It is marginally lesser than the industry average of 8.67 for FY15.
0.93

0.85

3.

0.85

Operating Asset Turnover

Operating assets are those used in normal operations, obtained by deducting current investment and term
deposit in banks from total assets. Turnover has increased in 2015, with rise in revenue from sales
showing good sign that most sales are coming from operating assets.
Operating Asset TurnOver

0.13

0.01

4.

0.01

Return on Financial Assets

The increase in financial income in 2013 was due to high net gain on sale of long-term investments
worth 245.14 crores. The ratio has remained constant if not for the above mentioned gain in this period.
Return on Financial Assets

MARKET ANALYSIS (Prospect of Firms Stock)

1. Price Earnings Ratio

16.47
13.28

14.91

Price Earnings Ratio measures the share price relative to per share
earnings. Firms desire a high PE ratio. For the market share price, the average of highest and lowest
share prices for that financial year are taken. PE ratio for Tata Chemicals increased from 13.28 (FY13)
to 16.47 (FY14). This is due to a significant decrease in EPS from 25.25 to 16.76, which was in turn
due to decrease in profits by about 32% from 643.32 crores to 436.07 crores. In FY15, the PE ratio was
14.91.
2013

2014

2015

3.54
3.34

2.98

2013

2014

2015

2. Dividend Yield
It is the ratio of dividend per share to market price per share and represents the cash return to
shareholders. In FY15, the company gave special dividends (over the normal dividends of 100%, 10.00
per share) of 25.00% (of 2.50 per share) on occasion of Platinum Jubilee Year of the Company. The total
return in FY14 was negative (-15.42%) because of fall in share price from 335.5 to 282. However the
company regained in FY15 with a return of 27.84%.

3. Price to book Ratio

1.87
1.55
1.28

2013
2014
2015
This ratio compares the companys stock price with book value. Tata
Chemicals had a low price to book ratio as compared to its competitors in Chemical Sector - Pidilite
(12.39) and UPL (5.56). However it has a respectable PB ratio as compared to Fertilizer Industry in
which it is less than 1 for most companies.
This low PB ratio could be due to the diverse segments in which Tata Chemicals deals, such as Inorganic
Chemicals, Fertilizers and Agri-inputs. It could also be due to underpricing of stock.

EARNINGS MANAGEMENT

The Beneish model M score for Tata Chemicals is -2.93 using 5 variable model. A lesser than value of
-2.22 indicates that the company is NOT likely to be a manipulator. (Refer Appendix for calculations)
RECOMMENDATIONS

We give a Buy recommendation to Tata chemicals due to the following reasons:

P/E ratio is low, hence we believe that Tata chemicalss P/E ratio can move up in future.
P/B ratio of Tata chemicals is low and hence it may be undervalued. Tata chemicalss P/B ratio has scope
to increase.
Profit Margin for Tata chemicals is relatively high.
Solvency Ratio of Tata chemicals is low. This leads to improved credibility of the firm.
Dividend payout ratio Tata chemicals has consistently payed dividends to its investors.
Expansion plans Tata chemicals plans to invest INR 5 billion over the next two years. They will also
increase their investments in high-tech products such as specialty fertilizers, herbicides, weedicides and
high grade seeds. Hence it has aggressive future growth plans.
Management Discussion seems to show that the management of the company is positive and confident
about the industry outlook and companys growing performance.

KEY LEARNINGS FROM THE PROJECT

10

The key indicators to market analysis were analysed and interpreted. An understanding of fundamental
ways to analyse a companys stocks were gained through this project.

11

Change in accounting policies can bring about a major change in profits of a company. Therefore it is
imperative to scrutinize the policies over years to get real picture of the financial status. In 2014 sales were
recognized on dispatch while in 2015 they were recognized on delivery. Other income interest and income
was done on accrual basis in 2014 which got changed to time proportion basis in 2015.

A poor inventory management system has led to pile up of inventory in 2015, highly skewing data on
operating profits and reducing the net cash flow from operations.