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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%).3

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 plans to expand its product portfolio and increase wallet share with existing clients along with expanding customer base. 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.

Robust financials:

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: 

INR5.0bn 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 & View:

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.

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