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Core business normalising; new products pipeline maturing

In FY23, Tatva Chintan (TATVA) earnings were hurt from a downcycle in its SDA business, which should resume growing FY24 onwards. The addition of a significant new customer to its SDA has the potential to propel growth in the near future. PASC segment will likely reap the benefit of products under qualification and long-term growth on the back of a robust pipeline and cleaner chemistry positioning. Electrolyte salt business anticipates inflection from CY25, as its customers win commercial projects, alongside TATVA establishing itself as a supplier for energy storage solutions in super-capacitor, zinc and sodium batteries. Flame retardant customers have indicated start of purchase soon, finding strength in bromine prices recovering, and China’s TBBA inventory normalising.

We incorporate TATVA’s fund raise, and equity dilution into our estimates and cut our FY24E EBITDA by 7.5%, but increase FY25E by 3.3%. Our EPS cuts of 22%/5% for FY24E/FY25E entail the equity dilution hit. Consequently, our revised target price stands at INR 2,000 (earlier INR 2,110) with an unchanged 30x FY25E PE multiple. Maintain BUY. Risks: 1) Failure to qualify for large PASC products, and add new customer in SDA. 2) Lower-than-expected margins.

SDA revenues to recover; likely impetus from customer addition

SDA revenues through the past six quarters were hurt from a slump in China’s commercial vehicles (CV) sales, and de-inventorisation by catalyst producers (refer case studies 2&3). China’s CV volumes have been seeing a slight resurgence (FY24-TD), and will likely continue building on gradually. Separately, TATVA is going through ‘qualification’ with a large customer and anticipates commercial supplies from early-24 – this should enable thicker SDA revenues. TATVA’s earnings earlier were mired in higher-cost inventories, now being liquidated, and infrequent operation of assemblies, which will likely benefit from volumes recovery.

European Union (EU) has proposed Euro-7 norms – stricter pollution norms for heavy duty vehicles, which could potentially drive higher sales for SDAs (new norms require ~40–50% more SDA/vehicle). Euro-7 is likely to see implementation from Jul’27. TATVA is also in the process of developing SDAs for a circular economy (plastic wastes); and ultra-purity chemicals for semiconductor application – these have high option value, in our view.

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