Should you subscribe to Tatva Chintan Pharma Chem IPO?

Tatva Chintan Pharma Chem (Tatva Chintan) incorporated in the year 1996 is a speciality chemicals manufacturer, producing a range of products across Phase Transfer Catalysts (PTC), Structure Directing Agents (SDA), Pharmaceutical and Agrochemical intermediates and other Specialty Chemicals (PASC), and electrolyte salts . The products find application in speciality chemicals with a particular emphasis on green chemistry solutions. Investors with a long-term view on speciality chemicals can take this route of exposure with Tatva Chintan, which provides efficient and sustainable solutions to chemical industries.

The IPO which is open for subscription till July 20, aims to raise a total of ₹500 crore with an offer for sale of ₹275 crore , and a fresh issue of ₹225 crore. The fresh issue proceeds will be utilised for capital expenditure of its Dahej facility (₹147 crore) and R&D facility (₹24 crore) apart from corporate purposes. The IPO range of ₹1,073 to 1,083 values the company at 41.6 times FY21 earnings and market capitalisation of ₹2,400 crore.

Niche segments

Tatva Chintan has built a significant market share in a specific niche of catalysts and intermediaries, which are finding new applications across industries. Tatva Chintan is amongst the largest producer, both domestically and internationally, for its segments SDA, PTC and PSAC. SDA which started in FY17 is the largest and the fastest growing segment for the company and now accounts for 40 per cent of revenues (₹120 crore) in FY21. SDA’s are used for manufacturing Zeolites which improve refining process, improve the yields of fuels, and most importantly reduce nitrogen oxide emissions. Tatva Chintan reported growth of 118 per cent CAGR in FY19-21 in SDA. The segment has high barriers to entry based on development timelines and client acquisition and can maintain high growth in the segment.

PTC’s allow for high energy and material efficiency in organic reactions, which finds applications across industries including pharmaceuticals and agrochem . The increasing scope for green chemistries which reduce the use of harmful solvents , will aid the uptake of PTC’s replacing traditional solvents and intermediaries. In its PASC division, also in its early stages, Tatva Chintan primarily produces Glymes used across specialty chemicals industries. The segment has gained from China +1 strategy where domestic companies are looking to on-board a local supplier for key intermediaries.

Finely positioned

India and China have added significant capacities in the last decade and Indian industry appears to be continuing on the same path. According to a HDFC report on Speciality Chemicals, the seven leading operators added capex of close to ₹7,800 crore in FY18-20 which is 1.5x the capex in FY16-18. Such vigorous growth in capacities will provide a twofold opportunity to Tatva Chintan in the future. Firstly, productivity will be the focus after capacity addition, and PTC’s and PASC products providing energy and material efficiency are suitable for improving asset utilisations with higher yields. Secondly, Indian ecosystem may follow the environmental footsteps of regulated markets which suits the Green chemistry based applications that Tatva Chintan provides. The higher export driven revenues of the company (71 per cent in FY21) can be attributed to stringent environmental laws in those markets. Tatva Chintan is also active in continuous flow chemistries with its products, which increases the yields and reduces wastage for companies.

Vehicle emission norms, being increasingly regulated from 2020 in India and other markets increases the demand for SDA’s from Tatva Chintan . New emission norms of BS-VI and Euro VI have made the use of catalytic converters like Zeolites more prominent increasing the scope for SDA’s. The high technology nature and specific applicability developed along with customers allows for a sticky relationship with its clients and also a high customer concentration on the flip side (16/60 per cent of revenues are from its top 1/10 clients).

Financials, valuations

Aided by SDA’s growth in the last three years Tatva Chintan reported a revenue growth of 21 per cent in FY19-21. The gross margins and implicitly the EBITDA margins saw a big jump to 50.3 per cent and 21.9 per cent respectively in FY21 which is a 550 bps improvement from levels in FY19 with higher contribution from SDA. The company attributes the EBITDA margins to its nascent stage and the IPO proceeds will utilised to add another 200 KL in the next two-three years. . The company has a healthy net debt-equity ratio of 0.51, while working capital cycle increased to 140 days. Tatva Chintan is reasonably valued compared to its peer range of 28-76 times, at 41.6x FY21 earnings. . The high growth potential from the products in the growth phase , support the high valuations for Tatva Chintan, ideal for ESG investing as well.

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