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Non-SDA revenue zooms, SDA crashes

Tatva Chintan’s Q1FY23 revenue declined 17% YoY and EBITDA dropped 41% YoY, which seem very disappointing. But we believe many stories are concealed behind the numbers and note that the entire under-performance was due to the 89% crash in SDA revenue. However, non-SDA revenue (up 65% YoY, 37% QoQ) was the silver lining, which indeed is heartening. SDA revenue decline is transitory and should grow in parallel with CV demand growth in China and India, and re-inventorying by customers. Company is still guiding for flattish revenue in SDA for FY23 (worst case: 10% dip), and for non-SDA revenue to sustain a base of >Rs800mn for remainder of the year. This implies the strong non-SDA performance in FY23-TD to remain intact. Margin decline is purely due to lower overall revenues. Company’s new project pipeline looks exciting with commercialisation of its first continuous flow plant when and flame retardant plant in FY23. The Dahej-2 plant is progressing well, and should commercialise in Dec’22 (this will potentially double the current capacity). We have trimmed our EPS estimates by 1-5% over FY23E-FY24E and accordingly cut the target price to Rs2,730 (from Rs2,875; 40x FY24E EPS, unchanged). Maintain BUY.

* Non-SDA revenue shines; SDA collapsed. Tatva Chintan’s Q1FY23 revenue fell 17.3% YoY (10.3% QoQ even on the low base) to Rs884mn and came 12.9% below our estimates. SDA revenue crashed 89% YoY and 84% QoQ to Rs62mn on disruption in auto production due to chip shortage. Company said very high inventory at customers’ end led to very low billing for Tatva Chintan. It expects revenue to bounce back from the next quarter itself, and H2FY23 to see major sales. It still believes SDA sales in FY23 may be same as in FY22 (Rs2.25bn), or conservatively 10% below the FY22 levels. PTC revenue rose 78.6% YoY / 35.8% QoQ to Rs407mn led by addition of MNC customers where Tatva Chintan solved supply-chain issues. This was also helped by the additional capacity available due to lower SDA sales. Electronic chemicals revenue grew 6x YoY / 3.2x QoQ to Rs71mn. PASC revenue rose 27.5% YoY / 24.6% QoQ to Rs345mn. The inferior revenue mix (SDA contribution falling) led to gross profit margin dip of 470bps QoQ to 54.9%. Other expenses were down 9.5% QoQ to Rs333mn. EBITDA declined 41% YoY (31% QoQ) to Rs152mn. EBITDA margin contracted 17.2% (down 510bps). Net profit fell 58% YoY to Rs98mn largely due to higher tax rate of 28.5%.

* SDA revenue dip transitory; new use case is evolving. Company believes SDA revenue in worst case can dip by 10% from FY22 levels. Underlying demand remains strong, and the decline was only due to lower offtake. Chip supply is likely to ease from Oct-Nov’22 and the company expects SDA revenue to grow in tandem. Company is carrying one-quarter inventory, hence in the case of strong demand it should be able to satisfy customer requirements. SDA revenue should be strong in H2FY23. Further, Tatva Chintan’s SDA has been approved by the sixth customer as well, and commercial scale piloting will be done in Q4FY23 with supply expected to start from FY24. Chinese buyer was severely impacted from lockdown and should normalise. Zeolite (made of SDA) is also being tested for recycling and the company has met success in this regard; this will open up a new use case for SDA.

* Promising developments in non-SDA businesses: 1) PTC – Company remains optimistic on PTC, which has seen traction from new customer additions, and availability of capacity due to lower SDA production. The Q1FY23 performance is expected to sustain. 2) Electronic chemicals – two new customers are working with Tatva Chintan to develop energy storage solutions. Tatva Chintan has developed an electrolyte solution for non-lithium batteries including sodium and zinc. 3) PASC – Company expects to commercialise its continuous flow based plant by Q4FY23. This is for one of the four products on which it is working along with the innovator MNC. Monoglyme will also have a pilot plant operational in FY23. 4) Flame retardant – Company is in the process of starting a pilot plant with 50-60te per month capacity, and large capacity expansion can be expected in Q4FY23.

* Other highlights. 1) Company expects Dahej-2 plant to start operations as expected in Dec’22 despite three weeks’ strike Gujarat. 2) Tax rate was higher due to higher profit mix from Ankleshwar plant, which is in full tax bracket. Dahel-1 is an export-oriented unit and has lower tax rates. Plant utilisation was low due to lower SDA revenue. Further, Dahej-1 plant has completed its 100% tax holiday and the benefit has dropped to 50%. Company estimates FY23 tax rate at 18- 20%.

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