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Rising visibility on FY24E EPS growth

Tatva Chintan’s Q2FY23 revenue fell 27.1% YoY and EBITDA plunged 68.9% YoY due to lower SDA sales, which seems very disappointing, but we believe this situation is transitory. Company expects recovery in SDA sales in Q4FY23 with revival in heavyduty truck sales in China. Non-SDA business revenue growth was strong, and gross profit margin has been impressive. FY24E outlook is significantly improving on the back of: 1) commercialisation of flame retardant whose product has been approved by two customers; 2) intermediate product for which two plants are likely to start in FY24, with more in pipeline; 3) acceleration in electrolyte salt revenue; and 4) increasing application of SDA in recycling. Though the company’s near-term performance is likely to be weak, potential for the next two years remains very strong in our view, and may surprise on the upside. We have slashed our EPS estimates by 37% for FY23E, but increased the same by 4.5% for FY24E on better margin performance. Accordingly, we raise the target price to Rs2,860 (from Rs2,730) with the multiple unchanged at 40x FY24E EPS. Maintain BUY. Key risks: 1) continued under-performance in SDA segment; and 2) lower than expected revenue from new products.

* Non-SDA revenue strong; SDA collapsed. Tatva Chintan’s Q2FY23 revenue fell 27.1% YoY (+1.9% QoQ) to Rs901mn and came 0.6% below our estimate. SDA revenue crashed 87% YoY to just Rs99mn on disruption in auto production due to chip shortage, and lower sales of heavy duty trucks in China. Company expects gradual recovery in SDA revenue from Q3FY23 and normalisation of the same in Q4FY23. Tatva Chintan is also holding very high inventory (Rs2bn), and expects to de-stock Rs0.6bn worth of it in H2FY23. It has started trial production of SDA for a new client, and its contribution to revenue should be visible in FY24E. Zeolite (made of SDA) is also being tested for recycling and the company has met with success in this regard; this will open up a new use case for SDA. Company expects SDA revenue in FY24 to cross the FY22 level of Rs2.25bn. PTC revenue rose 54.3% YoY / fell 20.2% QoQ to Rs324mn. This was helped by the additional capacity available due to lower SDA sales. Electronic chemicals revenue grew to Rs45mn (vs negligible in Q2FY22) on rising demand from energy storage (battery) application in mobility, and renewal energy. Its customer is in the process of capacity expansion, which will accelerate revenue growth for Tatva Chintan in the segment. PASC revenue rose 63.1% YoY / 22.8% QoQ to Rs423mn. The inferior revenue mix (due to falling SDA contribution) and trial production of flame retardant and mono glyme, led to 315bps QoQ contraction in gross profit margin to 51.8%. Other expenses rose 6.1% QoQ to Rs263mn. EBITDA fell 68.9% YoY (26.5% QoQ) to Rs112mn. EBITDA margin reduced to 12.4% (down 480bps QoQ) on higher fixed costs. Net profit fell 78% YoY to Rs71mn.

* Rising opportunities in intermediate, and mono glyme. Tatva Chintan has been working on various agrochemical / pharmaceutical intermediate products. Two of these products have completed pilot run, and the company should have commercial scale plants for them in FY24. It will also start mono glyme trial run using continuous flow chemistry in Dec’22. In addition, the company has completed lab scale KSM for agrochemicals. The total revenue opportunity from these products is Rs8bn-10bn.

* Flame retardant (BFR) ready for commercial production: Company has faced teething issues in production of flame retardant, but it has been successfully resolved after multiple sample trials. The product has been approved by two customers, and the company expects acceleration in revenue post commissioning the new plant (Dahej-2). It also expects BFR to contribute materially in FY24.

* Other highlights. 1) Company expects Dahej-2 plant to start operations as expected in Dec’22. 2) Tax rate FY23 will be higher due to higher profit mix from Ankleshwar plant, which is in the 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 now dropped to 50%. 3) Heady-duty commercial vehicles sale has dropped by 50% in China on continued lockdown, which has impacted sales of SDA for one of its customers. 4) Pilot plant equipment supply has been delayed by a quarter for mono glyme due to non-availability of key heating component. Company expects the pilot plant to start operations in mid-Dec’22 (analytical run will be carried out for 3-4 months). Commercial plant should take another 18 months to start operations. Company has achieved the required Rs4bn.

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