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Durable growth in niche chemistries

We hosted promoters of Tatva Chinta Pharma Chem – Mr. Chintan Shah and Mr. Shekhar Somani for investors meeting. The management expects growth in SDAs to continue, and opportunities are increasing for emission control beyond transport vehicles. Tatva Chintan should grow faster from new customer wins, and likely supply to developed market for Euro-7. It has cracked products that are high in purity, and has found application in semi-conductor industry. Supercapacitor batteries are being commercially launched which should drive growth for electrolyte salt. PASC will benefit from the knowledge of continuous flow chemistry, and the company is already in the process of commercialising products. It has reiterated its sustainable EBITDA margin guidance of 22-24%, and Dahej plant commissioning by Nov/Dec’22.

We have cut our EPS estimates by 15% for FY22 on lower SDA sales (on chip shortage) and by 4-6% for FY23-24E. We forecast revenue / EPS CAGR of 31% / 28% over FY22-24E. Accordingly, we cut our target price to Rs3,000 (from Rs3,110, 40x FY24E EPS). Maintain BUY. Our estimate does not completely capture the rising opportunities in semi-conductor industry and PASC.

SDA market remains exciting

* Tatva Chintan estimates SDA opportunity at 24-30ktpa for auto emission; the other next big segment is refining. The growth in auto is from NOx reduction which has been driven by the implementation of Euro-6 equivalent norms in India (BS-6) and China (China emission norm 6a). Tatva Chintan has market share of ~12-15% in emission control SDAs and SACHEM is the market leader.

* The high-entry barriers are technology (electrolysis process in organic chemistry) and long approval cycle. It does not anticipate any new entrant in the foreseeable future, thus, the industry will continue to remain only two-players market.

* For Tatva Chintan, SDAs for auto emission control are ~80% of SDA revenue of which ~80% comes from large commercial vehicles. Rest of SDA revenue comes from zeolites which find uses in petrochemicals refining, continuous flow chemistry etc.

* In near term, demand for SDAs has been impacted by chip shortage, but the company remains confident of achieving growth on normalisation.

* It has recently won a large customer for auto emission SDA in the US, and is in the process for approval from another large European customer. Tatva Chintan currently supplies to one Japanese, European and Chinese customer each. Globally, there are nine large zeolite manufacturers (which includes BASF, Clariant, Tosoh, PIDC and others) and four catalyst manufacturers (BASF, Clariant, Johnson Matthey and Umicore). Technology for emission control is controlled by catalyst manufacturers.

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