Tatva Chintan IPO: Tatva Chintan Pharma Analysis
Tatva Chintan Pharma IPO, which opened for subscription this morning, has been subscribed by about 4 times so far. The company is looking to raise Rs 500 crore through the public issue.Here are the details:
About Tatva Chintan Pharma Chem Limited:
- Tatva Chintan Pharma Chem has over two decades of experience in chemical manufacturing and was incorporated on June 12, 1996.
- Tatva Chintan is a chemical manufacturing company that manufactures phase transfer catalysts (PTCs), structure-directing agents (SDAs), agrochemical and pharmaceutical intermediates, and other specialty chemicals.
- In India, it is one of the largest manufacturers of SDAs for zeolites.
- The company has customers from various sectors. To name a few – agrochemical, dyes and pigments, paints and coating, automotive, petroleum, personal care, pharmaceutical, etc.
- The company has business in other countries as well and exports its product to 25+ countries. The major countries where it imports are the USA, China, UK, Germany, and South Africa.
- The company has two manufacturing facilities in India situated at Ankleshwar and Dahej in Gujarat. They also have set up wholly-owned subsidiaries in the USA and Netherlands. This is mainly for their marketing & distribution arms.
The company has over 154 products as of 31 March 2021 which is divided into four categories:
- Structure Directing Agents (SDA) – These are chemicals that help in the formation of particular channels and pores during the synthesis of zeolites.
- Phase Transfer catalysts (PTC) – These are used to facilitate the migration of a reactant and are widely used in green chemistry applications.
- Electrolyte salts for super capacitor batteries – The company is the largest producer of electrolyte salts used for super capacitor batteries in India.
- Pharmaceutical and Agrochemical intermediates and other specialty chemicals – Under this category, the company manufactures various agrochemical and pharmaceutical products as disinfectants and catalysts.
- The company’s RFO from the operation grew from Rs 206 cr in FY19 to Rs 300 crore in FY21 at a CAGR of 20.6%.
- The net profit has also increased from Rs 21 cr FY19 to Rs 52 cr in FY21. A CAGR of 57.3%.
- Tatva’s installed reactor capacity grew from 160 to 280 KL (kilolitre), and their Assembly Lines grew from 10 to 17 respectively from FY18 to FY20.
- At the onset of covid 19 pandemic in March 2020, initially their facilities were operating at sub-optimal capacity utilization due to limited availability of labour, logistics and supply chain constraints. Subsequently, the capacity utilization has improved, raw material suppliers have resumed operations and supply and logistics have become more regular.
- Tatva Chintan has strong R&D activities which helps them to expand their product offerings. The benefits of the products they develop are seen for a long time period. Since March 31, 2011, they have developed 82 products which contributed 23% to their revenues in FY21.
- During the FY21, FY20, and FY19, exports of products amounted to Rs 143.52 crore, Rs 202.02 crore, and Rs 211.99 crore which accounted for 69.57%, 76.74%, and 70.58%, of its revenue from operations, respectively.
Tatva Chintan operates has competitors both in India as well as globally. The listed peers of the company are Aarti Industries Ltd, PI Industries Ltd, Fine Organic Industries Ltd, Delta Finochem, Dishman group, and Pacific Organics Pvt. Ltd.
- Tatva Chintan has the lowest EPS of Rs 26 per share. Alkyl Amines Chemicals leads the pack in EPS, PE and RoNW.
- Tatva Chintan has the lowest total revenue of Rs 306 cr in the pack. This means the company is still relatively small and in the growth stage.
- The asking price places the at P/E around 45.95 which is lower and reasonably priced as the industry composite is around 56.
- Tatva Chintan has the 2nd highest RoNW at 31%, just after Alkyl Amines Chemicals.
- Alkyl Amines which has 5.5 times the EPS of Tatva, and higher RoNW at 37% is also cheaply priced at 26 times the FY21 Earnings.
Acquiring customers globally at an accelerating rate: The varied applications for their product portfolio have helped them build a wide customer base across many sectors. Of their entire customer base as of March 31, 2021, 46.86% of these customers have been their customers for less than 5 years and 53.14% of these customers have been their customers for over 5 years. Their exports accounted for 69.57%, 76.74% and 70.58% of their revenue from operations for FY19, 20 and 21,respectively.
Modern, clean and green manufacturing facilities: They have successfully converted their Ankleshwar Manufacturing Facility into a ‘zero liquid effluent discharge’ facility from January 2020. The company, over the years, has focused on sustainable supply chain solutions by managing the entire value chain. Currently, each of their manufacturing facilities has accreditations including the ISO 14001:2015 and ISO 9001:2015 certifications for quality management, environment and health & safety systems.
Leading manufacturer of SDA and PTC with consistent quality: With very few players in the Indian and global market, tatva Chintan is the largest and only commercial manufacturer of SDAs for zeolites in India. It also enjoys the second largest position globally. Tatva Chintan operates in a market that is expected to grow at over 7% CAGR through 2020-25F with Korea and China dominating the market. However, with just 2-3 players in the domestic market, Tatva Chintan has an opportunity to expand and explore the global market. Opportunities in the automotive industry continue to grow, as compliance with the regulations regarding the emission control in commercial vehicles becomes a mandate worldwide. On a domestic level, the company is the only manufacturer in India.
R&D capabilities: Tatva is heavily focused on R&D. The company R&D capabilities have enabled them to expand product offerings from 72 products as at March 31, 2011 to more than 154 products as at March 31, 2021. The company is also going to use Rs 24 cr of their IPO proceeds to upgrade their Vadodara R&D facility. They are also aiming to develop technologies to produce conventional products using new-age technologies such as continuous flow chemistry and electrolysis processes.
Extract more business from existing customers and expand customer base:
- Existing customers: Tatva has built strong relationships with some of their customers which they intend to leverage by cross-selling their diversified product portfolio.
- New customers: Tatva plans on utilizing their expanded geographical footprint to address the sourcing requirements of their existing multinational customers as and when they enter new markets. Several global players prefer a “China + 1 offshore strategy”, with capacities shifting to cost efficient markets with strong technology capabilities like India. The company offers customers a reliable option to satisfy their specialty chemicals requirements.
Expanding production capacity: Company’s aggregate manufacturing capacity has increased at a CAGR of 20.59%. The company plans to spend Rs 147 cr of the IPO proceeds to expand their facility at Dahej. They will look to add capacity in a phased manner to ensure that they utilize their capacity at optimal levels.
Failure to comply with the quality standards and technical specifications: Given the nature of the products, customers have high standards for product quality as well as delivery schedules. Adherence to quality standards in the given time limit is a critical factor in the manufacturing process. Any lack of quality, not being able to meet technical requirements or late delivery in the products may lead to cancellation of the orders.
Increase in the cost of raw materials: The company does not have long term agreements with most of their raw material suppliers and acquire such raw materials pursuant to purchase orders from suppliers as a result of which, they are required to forecast supply and demand.
Significant portion of revenue from a few customers: The company depends on a limited number of customers for a significant portion of revenue. Their top 10 customers accounted for 59.99% of revenue from operations in FY21 up 1300 bps from 46.99% in FY19.
About the issue:
Issue open: 16 July – 20 July 2021
Price band: Rs 1,073 -1,083 per share
Issue Size: Rs 500 cr (Fresh equity shares worth Rs 225 crore and offer for sale by promoters and shareholders worth Rs 275 crore.)
Reservation: QIB 50%, Retail – 35%, NII 15%.
Employee Reservation: NA
Bid lot: 13 shares, and in multiples of 13 shares
The company will be using Rs 147 cr of the proceeds for the expansion of the Dahej manufacturing facility and Rs. 24 cr for upgradation at the R&D facility in Vadodara in the upcoming financial years.