Goldman Sachs downgrades Tata Chemicals to ‘neutral’ from ‘buy’

Goldman Sachs downgrades Tata Chemicals to ‘neutral’ from ‘buy’ with a 12-month P/BV-based target price of Rs 140, implying downside potential of 12% from here. With a weakening global economy and consequent correction in agri commodity prices, Goldman Sachs now expects downside risk to Tata Chemicals earnings from its soda ash and fertiliser businesses.

It forecasts soda ash prices to decline by 20-25 % globally in FY10E, primarily due to: (1) soda ash producers not having the necessary pricing power to retain the benefit of low energy prices; (2) softening demand due to a slowdown in the global economy; and (3) a surge in Chinese soda ash capacity of about 4 million tonnes over the next two years, which may have a material impact on Asia’s soda ash margins.

The 12-month target price of Rs 140 is based on a trough P/BV multiple of 0.8x. Key risks to the target price include: (1) renewal of soda ash prices at prices higher than estimates; (2) further depreciation of the rupee against the dollar; and (3) a rebound in international urea prices.