Its raining IPOs: Tatva Chintan Pharma
Helpint #001
While the world was busy "ordering" Zomato, we thought of covering the unusual suspect…
ABOUT THE IPO
Tatva Chintan Pharma Chem Ltd. has been approved to raise fresh capital of ₹225 Cr. from the equity market, and the remaining amount out of ₹500 Cr. has been allotted to offer for sale, reducing the promoters' stake in the business from the current 100% to ~79%. The company's GMP suggests a grand entry into the secondary markets, with book running lead managers being the ICICI Securities and JM Financial. As per the DRHP, the amount raised would be utilized in incurring expansion CAPEX in its Dahej plant (current reactor capacity of 190 KL with 14 installed assembly lines), up-gradation of the R&D facility in Vadodara, and general corporate purposes.
BUSINESS
Tatva Chintan Pharma Chem Ltd. is a chemical manufacturing company incorporated in 1996 is engaged in a total of 154 products under four key categories, i.e., Structure Directing Agents (SDAs), Phase Transfer Catalysts (PTCs), electrolyte salts for super-capacitor batteries, and pharmaceutical and agrochemical intermediates and other specialty chemicals (PASCs). The company's engagement in specialty chemicals makes it an essential part of its customers' overall value chain. Its products become an important raw material in the manufacturing of finished products of its clients.
With a continued focus on R&D, the company has grown its product offerings by more than 2x over the last ten years. Similarly, the company has expanded heavily with a current installed reactor capacity of 280 KL and 17 assembly lines in FY21 (vs. reactor capacity of 160 KL and 10 assembly lines in FY19) across two plants in Ankleshwar and Dahej in Gujarat. Today, they propose a CAPEX plan of ~147 Cr. for expansion in the Dahej plant and another ~24 Cr. for expanding R&D operations in Vadodara through the net proceeds from fresh issue.
The company generated around 72% of the revenues from the international market through exports, and the revenue base is geographically diversified as it exports to over 25 countries. Some of its key customers include Merck, Bayer AG, Asian Paints Ltd., Ipox Chemicals KFT, Laurus Labs Ltd., Tosoh Asia Pte. Ltd., SRF Limited, Navin Fluorine International Limited, Oriental Aromatics Ltd., Atul Limited, Otsuka Chemical (i) Pvt Ltd., Meghmani Organics Limited, Divi’s Laboratories Limited, Hawks Chemical Company Limited, Firmenich Aromatics Prod. (I) Pvt. Ltd., Jiangsu Guotai Super Power New Materials Co., Ltd., and Jade Chem Co. Ltd.
PRODUCT PORTFOLIO
Incorporating the business with just 1 product in 1996, Tatva Chintan has grown its offerings significantly with a total portfolio of 154 products as of March 31, 2021. The major categories and the usage in various industries makes the offerings pretty diversified.
Structure Directing Agents (SDAs): SDAs that contribute to around 40% of the company's total revenue are used extensively in manufacturing zeolites. Zeolites are used in a wide array of catalytic processes. More recently, their usage in emission control has been found to be effective and hence, is used in the automotive industry. The market for zeolites is expected to grow at 3-5% CAGR by 2024. Tatva Chintan is the largest manufacturer of SDAs for Zeolites in India and the 2nd largest player globally and is the only company that controls the entire value chain of Zeolites.
Phase Transfer Catalysts (PTCs): PTCs that contribute to around 27% of the company's total revenue are used in migration from one reaction phase to another while reducing wastage and by-products, eliminating the need for expensive raw materials. With the growing adoption of green chemistry in organic synthesis, the PTC market is expected to grow at an annual rate of 5.2% (globally) and 6.6% (India) by 2024. The increasing stringent regulations in western countries have increased the demand for PTCs in pharmaceuticals. Another industry where the PTCs have a vast application is Agrochemicals. Tatva Chintan enjoys the leadership position as the largest producer in India. It is also one of the leading players across the globe while competing with Delta Finochem, Dishman group, and Pacific Organics Pvt. Ltd. in the export domain.
Electrolyte salts: This category of products is used in Battery Supercapacitors and contributes around 1% of the company's total revenues. The application of these capacitors includes the automotive segment, consumer electronics, renewable energy infrastructure, etc. With the growing shift to a greener energy source across industries, the supercapacitor demand is expected to grow at 26% CAGR by 2024 globally. It is among the key players in the battery electrolyte segment and is the largest producer of organic battery electrolytes for supercapacitors in India.
Pharmaceutical and agrochemical intermediaries and other specialty chemicals (PASCs): This category of products contribute ~30% of the company's revenues. Generally, these are used as catalysts in chemical reactions across varied segments such as manufacturing, crop protection, detergents, paints, coatings, etc. The market is expected to grow at ~5% globally, with the most significant growth expected from the pharma industry and personal care products. The company would enjoy high growth in this segment due to engagement in high growth industries such as agrochemicals, paint & coatings, personal care, etc.
IS THE BUSINESS MOATED?
The company is the largest and only manufacturer of zeolites in India. They hold the 2nd most prominent position globally. Due to only a handful of players in this segment and growth prospects arising because of emission control compliance regulation in the automotive sector, the company is well placed on building a huge market for itself.
The varied application of product portfolios helps the company to create a wide customer base. It has established long-standing relationships with marquee players across various industries. Customers generally select suppliers based on their experience and develop long-term relationships with them. Due to the complex nature of the specialty chemicals industry, it observes high switching costs.
The company has a DSIR approved state-of-the-art R&D facility in Vadodara. It has developed its diversified product portfolio by continuously working on R&D initiatives. In the last ten years, they successfully commercialized 82 products, contributing to ~25% of total revenue in FY21. Due to the lengthy approval process and stringent regulatory hurdles, this industry faces a high entry barrier.
The technical know-how and R&D capabilities have helped the company gain valuable insights across the entire value chain. The product offerings of the company help them to implement forward integration in its operations. This, in turn, enables them to innovate and customize their product to keep broadening the product offerings.
BUSINESS RISKS
The raw materials cost for the company is high, and it constitutes 50.24% of revenue from operations. Though the company has a long-term relationship with its vendors, it does not have long-term contracts. This exposes them to the volatility in prices of raw materials. They also rely on a limited number of suppliers for certain raw materials; hence, the loss of such suppliers could disrupt their operations.
The top 10 customers of the company accounted for 47% of the sales in FY21. As the company does not have long-term contracts with the customers, the loss of any key customer could result in heavy revenue loss.
Company exports products amounting to more than 70% of its revenue from operation to over 25 countries. Any social, economic, political, environmental crisis in those countries could adversely affect the business.
The company handles and uses hazardous materials in its R&D and manufacturing activities. Any improper handling could result in accidents that may damage the environment. This poses a threat to its operations and the brand image.
FINANCIALS
The company has witnessed strong revenue growth in the last two years, which grew at 21.7% CAGR between FY19 and FY21, led by exceptionally high SDAs and PASCs segment growth.
The margin ratios have improved consistently over the past three years, with EBITDA margin at ~23% (vs. ~17% in FY19) and PAT margin at ~17% (vs. ~10% in FY19).
The company has also performed well on the return front, with Return on Equity at ~32% (vs. ~26% in FY19), while the Return on Capital Employed stood at ~33% (vs. ~26% in FY19).
While performing well on the return ratios, the company has decreased its Debt/ Capital over the years while improving its coverage for debt, as seen by Net Debt/ EBITDA at 1.19x.
Although the company has generated positive cash from operations, the free cash flow has been negative over the past three years. The negative free cash flow may signify the heavy CAPEX required to maintain the company's position in the market, as seen from the company's significant cash outlay in Investing activities.
The receivable days have increased significantly in FY21, which caused the CFO to decrease in the same year. The rising receivables might be a cause of concern as receivables significantly increased by 83% in FY21 while the revenues raised by only 14% in the same year. The cause for concern is the rising debtors in the 30-90 days past the due date bucket. Whether the company is trying to bloat its revenue, or is it just the effect of the pandemic?
VALUATION
The upper price band of ₹1,083 suggests that the company P/E is ~41x, below its peer's median level of ~75x. Its P/BV presents a different view where the company is valued at a higher multiple. Its higher P/BV may be justified given the significantly higher RoE and market leadership in specific segments.
FINAL COMMENTS
The Credit rating agencies have also given a thumbs up to the company by upgrading its long-term ratings to A- (Stable Outlook) from BBB+. The company has grown its customer base very well and has proved to maintain a long-standing relationship with them. The promoter's experience in the industry has shown to be working for the company given the solid financial track record.
After the blockbuster listing of its peer, Clean Science Technologies, on 19th July 2021, do you think it will match its peer's performance in the market?
Disclaimer: The content published is only for educational purpose and not any kind of investment advice..
Author(s): Akshit Agrawal, Indrajeet Kenjale
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Great
Cleared many Of my doubts here, thanks guys