Motilal Oswal Gives ‘Subscribe' Rating To Tatva Chintan Pharma IPO

Tatva Chintan Pharma Chem Ltd (TCPCL) is a specialty chemicals manufacturer, with a diverse portfolio of structure directing agents (SDAs; 40% of revenues), phase transfer catalysts (PTCs; 27%), electrolyte salts (ES; 1%) for super capacitor batteries (SCB) and pharmaceutical/ agrochemical intermediates and other specialty chemicals (PASC; 30%). The company has come up its IPO and here are listed all the variables that need to be looked for before as Motilal gives a 'Subscribe' rating to the IPO.

The brokerage has mentioned some of the positives in its report stating:

Tatva Chintan is a leading manufacturer of SDA and PTC globally:

TCPCL is the largest and the only manufacturer of SDAs (40% of revenue) for Zeolites in India while it is the 2nd largest globally. In case of PTC (27%), it is the largest producer in India and one of the global leaders. The SDA and PTC products have various applications in green chemistry, which is gaining prominence considering the growing focus on green and sustainable technologies. TCPCL derives ~71% of its revenue from exports where multiple opportunities are emerging.

Robust expansion plans to capitalize on the industry growth prospects:

Indian specialty chemical market is expected to grow at 11.3% CAGR over CY19-24E (F&S report) vs 5.3% globally. Further India's chemical export is expected to grow at 13% CAGR (CY19-24E) vs China's 7% due to China+1 strategy being adopted by majority of the global firms. TCPCL is well placed to capture this opportunity with niche and diversified product portfolio across various industries. It further plans to focus on green chemistry by developing new-age technologies, demand for which is expected to grow at 10.5% CAGR globally, said the report.

Financials also depict healthy backing:

"Over FY18-21, TCPCL Revenue/EBITDA/Adj. PAT grew at a CAGR of 30%/42%/62%, supported by margin expansion of 499bps to 21.9% and lower taxes due to tax holiday enjoyed by its Dahej facility. The return ratios are healthy with FY21 RoE/RoCE at 20.5%/16.8% on post diluted basis".

Issue Size:

INR 5.0 billion or Rs. 500 crore IPO consists of fresh issue of INR2.3bn and OFS of INR2.7bn (by promoters), which will reduce promoters stake to 79.2% from earlier 100%. The funds will be utilized for expansion of Dahej plant (INR14.7bn) and for upgradation of R&D facility in Vadodara (INR2.4bn).

Valuation reasonable in comparison to listed peers, hence 'Subscribe' Rating to the Tatva Chintan IPO issue:

"We like TCPCL due its leadership position, wide product portfolio, strong client relationship and high entry barriers. The company is expected to witness strong growth for next 2-3 years given its expansion plans. It is well placed to tap opportunity in the fast growing specialty chemical space with increasing focus on green chemistry by leveraging its strong R&D capabilities. The issue is valued at 45.9x FY21 P/E on post issue basis, which appears reasonable compared to peers (avg. P/E of 59x), as it enjoys higher earnings growth (62% CAGR vs. avg. 38% CAGR for peers over FY18-21). Hence, we recommend Subscribe", added the report.

Y/E March	FY18	FY19	FY20	FY21
Revenue	1358	2063	2632	3004
Growth (%)	-	51.9	27.6	14.1
Adj PAT	123	200	378	523
Growth (%)	-	62.6	89.1	38.3
EPS (INR)	5.5	9	17	23.6
RoE (%)	20.8	25.1	38.3	20.5
P/E	195.3	120.1	63.5	45.9

Disclaimer:

The brokerage inputs are mentioned in respect of the Tatva Chintan IPO. Investors should take investment on their own research and neither the company nor its employees shall be responsible for any losses incurred for any decision taken on the report above.

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