Tata Chemicals is the third-largest manufacturer of soda ash in the world. Soda ash is one of the most widely used chemicals - used to manufacture glass, detergents, paper, baking soda, and even in water treatment.
Over the last many years, the demand for soda ash had been pretty stable - it served mature industries, Tata Chemical was amongst the largest players, and the industry moved at GDP-equivalent rates.
But this company, which makes the rather boring-sounding chemical soda ash, is now seeing some explosive growth, which has sent the stock flying. The stock has been up 14% in the last year and 3.5x over the last three years.
It has even been part of our Value Migration portfolio since October 2021 and has given us a return of 18%.
Here are 7 reasons why we like Tata Chemicals:
Demand for soda ash Soda ash seemed like a rather mature market earlier, but demand has been increasing over the last few years, driven by
increasing usage of glass in buildings, and solar glass
use of soda ash in manufacturing Lithium Carbonate, which is used in EV batteries, and
increasing demand for water treatment.
Prowess in a growing market Tata Chemicals is the third largest globally is well-capitalised to take advantage of the increasing demand for soda ash. With increasing demand, Tata Chemicals is on track to increase capacity by 30% on top of the 4.4 million tonnes per annum (MTPA) of installed capacity and ongoing expansion, which help further capitalise on growing demand.
Cost advantage Soda Ash can either be made using a mineral called Trona or by an industrial process called the Solvay Process. Tata Chemicals largely relies on Trona mines for production in the United States and in Africa. This provides the company with a unique advantage because it does not have to rely on external raw materials.
The Solvay Process requires the use of ammonia, which has seen a dramatic rise in prices post the Russia-Ukraine conflict since it is derived from natural gas, which has been in a massive short supply. This situation gives Tata Chemicals a unique cost advantage.
Favourable pricing With the increase in prices of raw materials and increasing demand, manufacturers have been able to pass costs on in the form of higher pricing. The combination of volume and pricing growth bodes well for manufacturers. For Tata Chemicals, a lower cost advantage gives it a pricing/margin advantage in the current scenario.
Business restructuring The advantage of being present in the manufacture of soda ash is that chemistry connects you to making salt, cement and sodium bicarbonate too. This made Tata Chemicals the largest salt manufacturer in India. Everyone’s heard of Tata Namak!
However, this also meant Tata Chemicals added a B2C business to its existing B2B business; and even diversified into spices, instant food, cereals and pulses as an extension to that business, which seemed like a complex diversion.
It finally sold the business to Tata Consumer Products, and became a focused chemicals company, helping long-term focus and better capital allocation.
Entry into specialty chemicals While soda ash and sodium bicarbonate are basic chemicals (with basic uses), Tata Chemicals is now getting into the specialty chemicals space - used in medicines or in pharmaceuticals, or other specialised applications.
These often attract more sticky customers, higher pricing, better margins, better return ratios, and subsequently even higher valuations.
Potential of new businesses While basic chemicals have been the cash cow for Tata Chemicals, it has been deploying capital into new and emerging areas. It has been investing in areas like High-Density Silica, nutraceuticals and EV batteries to drive the next leg of growth.
These businesses are nascent and offer the potential for multiple years of high growth to compensate for the potential maturity of its base businesses, and maintain a high-growth path.
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