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On track for new initiatives

Tatva Chintan’s Q3FY22 revenue growth was 12% lower than our estimate on higher dip in SDA revenue. However, margin expansion of 130bps QoQ despite inferior revenue mix was a positive surprise on better product mix in PTC and PASC. It sees moderate growth even in Q4FY22, but it is building inventory to service higher demand on normalisation. It has acquired two new large customers in SDA which should help accelerate volume off-take and only one large customer is now left to approve its product. New initiatives are fast crystallising with the company seeing commercial prospects for two products using continuous flow method in next 12-18 months which provides longevity to revenue growth. We have increased our EPS estimate for FY22/23/24 by 29%/9.4%/6.5% on higher-than-expected margin delivery. Accordingly, we increase our target price to Rs3,110 (from Rs2,920) valuing the company at 40x FY24E EPS. Maintain BUY.

* Revenue growth missed our estimate, higher margins made for shortfall. Tatva Chintan’s Q3FY22 revenue grew 31% YoY to Rs1bn and came 12% below our estimate. SDA revenue dipped 30.5% QoQ to Rs533mn on disruption in auto production from chip shortage, and PASC revenue fell 10% QoQ to Rs234mn. Electronic chemicals surprised positively with Rs22mn revenue on increasing demand / production of super-capacitor batteries. PTC revenue grew 17.5% QoQ to Rs247mn on higher capacity availability. Despite inferior revenue mix (SDA contribution falling), gross profit margin improved 130bps QoQ to 56.8% on higher-margin products sold in PTC and PASC segment. Other expenses increased due to cost involved in transit to US and Europe subsidiaries which are unsold. EBITDA dipped 2.9% YoY (33% QoQ) to Rs238mn, but net profit was up 9.2% YoY to 228mn on lower effective tax rate. The company believes revenue growth in Q4FY22 will also be impacted by lower auto production; normalisation only from Q1FY23.

* Outlook for SDA improving with customer acquisition. Tatva Chintan has added two more customers for SDA out of three major customers it was aiming for. It took two and five years for getting approval despite only one supplier, which shows high-entry barrier. It is still working with one large customer who is yet to approve its SDA. Tatva Chintan expects gradual ramp-up in sales from these customers starting April’22. New customer acquisition should help the company utilise new plant which is expected to commercialise by Nov’22. NOx emission reduction related SDA contributes 80% to SDA revenue for the company

* Electrolyte salts hitting growth trajectory. Electrolyte salt revenue jumped to Rs22mn (though small in revenue size but opportunity could be very big eventually) vs Rs30mn in FY21. The company is seeing increased orderbook for Q4FY22 and Q1FY23. Supercapacitor battery penetration is rising which is helping it drive higher revenues. It is also working with two new customers who will produce super-capacitor batteries for energy storage produced from renewable source. Existing customer has application in electric vehicle to increase life of lithium-ion batteries. Tatva Chintan is among the three known global manufacturers of electrolyte salt for super-capacitor batteries.

* New initiatives crystallising. Tatva Chintan has been working on certain new initiatives which are fast crystallising and may help it drive growth faster in future. 1) Glyme – it is working on commercialising pilot plant using continuous flow method. It is among four solvents used for dissolving electrolyte salt in lithium-ion batteries; 2) agro and pharmaceuticals intermediates - it has submitted sample for one large agro-chemical intermediate, and another product has seen good R&D output. Two more products in pipeline are in primitive stage; and 3) the company has achieved break-through in three new products which will find applications in electrolyte salts for batteries and as pharmaceutical intermediates, inks and solvent coating for metal particularly electrodes in lithium-ion batteries.

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