Tatva Chintan is a specialty chemicals manufacturing company engaged in the manufacture of a diverse portfolio of structure-directing agents (“SDAs”), phase transfer catalysts (“PTCs”), electrolyte salts for supercapacitor batteries and pharmaceutical and agrochemical intermediates, and other specialty chemicals (“PASC”).

The Company is the largest and only commercial manufacturer of SDAs for zeolites in India. It also enjoys the second-largest position globally. (Source: F&S Report) In addition, the Company is one of the leading global producers of an entire range of PTCs in India and one of the key producers across the globe. (Source: F&S Report) 

IPO details:

Issue size: ₹ 500 Cr (OFS of 275Cr & Fresh Issue of 225Cr)

Post Issue Implied Market Cap: ₹ 2,400 Cr (at the upper band)

Price band : ₹ 1,073 – 1,083 

Bid Lot: 13 shares and in multiples thereof

The issue opens on: Friday, 16th July’2021 

The issue closes on: Tuesday, 20th July’2021

Issue Breakup: QIB- 50% | NIB- 15% | Retail- 35% 

About the company:

As a manufacturer of specialty chemicals, they focus on the application of the products which form a key ingredient to their customers’ manufacturing and industrial processes. For instance, their SDA and PTC products have various applications in green chemistry, which is pertinent considering the growing focus on green and sustainable technologies. 

Wide Application of Customers: They serve customers across various industries, including the automotive, petroleum, pharmaceutical, agrochemicals, paints and coatings, dyes and pigments, personal care, and flavor and fragrances industries.

They manufacture over 154 products spread across 4 categories:

Structure Directing Agents: 

  • Their SDAs are quaternary salts which are chemicals that help in the formation of particular channels and pores during the synthesis of zeolites. Zeolites have varied applications including as catalysts and adsorbents. In particular, zeolites promoted with transition metals such as copper and iron have been proven to be active for selective catalytic reduction, which is currently considered as one of the preferred technologies for emission control in automotive applications.
  • 47 products, Increased from 12% to 40% of rev in 3 years

Phase Transfer Catalysts:

  • Their PTCs are used to facilitate the migration of a reactant from one phase into another phase where the reaction occurs, in a heterogeneous multi-phase system. PTCs are used for a variety of industrial processes. Phase transfer catalysts are a type of catalyst that allows a reactant to be migrated from one phase to another where the reaction takes place eliminating the need for costly and unsafe solvents that can dissolve all reactants in one phase, and costly raw materials minimizing the issue of waste.
  • 48 products, Decreased from 40% to 27% of rev in 3 years

Electrolyte salts for supercapacitor batteries: 

  • The electrolyte salts are used in the manufacture of supercapacitor batteries, which are used in automobile batteries and other batteries. The Company is the largest producer of electrolyte salts for supercapacitor batteries in India.
  • 6 products, 1% of rev

Pharmaceutical and agrochemical intermediates and other specialty chemicals: 

  •  The products manufactured by us under this category are used in the manufacture of various pharmaceutical and agrochemical products as intermediates, disinfectants and catalysts, and solvents. In addition, they also manufacture specialty chemicals under this category that are used in dyes and pigments, personal care ingredients, flavour and fragrance sectors.
  • 53 products, Decreased from 42% to 30% of rev in 3 years

Their customers include Merck, Bayer AG, Asian Paints Ltd., Ipox Chemicals KFT, Laurus Labs Ltd., Tosoh Asia Pte. Ltd., SRF Limited, Navin Fluorine International Limited, Oriental Aromatics Ltd., Atul Limited, Otsuka Chemical (i) Pvt Ltd., Meghmani Organics Limited, Divi’s Laboratories Limited, Hawks Chemical Company Limited, Firmenich Aromatics Prod.(I) Pvt. Ltd., Jiangsu Guotai Super Power New Materials Co., Ltd. & Jade Chem Co. Ltd.

Development of newer products: 82 products have been developed by them since March 31, 2011, and these products have contributed ₹ 710.43 million, ₹ 549.11 million and ₹ 266.26 million to their total revenue, which constituted 23.19%, 20.75%, and 12.88% of their total revenue, in Fiscals 2021, 2020, and 2019, respectively.

Strengths

  1. Leading manufacturer of structure directing agents and phase transfer catalysts
  2. Global presence with a wide customer base across various industries having high entry barriers 
  1. Modern manufacturing facilities with a focus on ‘green’ chemistry processes
  2. Experienced Promoters with a strong management team
    1. The management team comprises Promoters, Mr. Chintan Shah, Mr. Ajay Patel and Mr. Shekhar Somani, who each have over 24 years in the specialty chemicals manufacturing industry and have established strong business relationships with domestic and overseas customers.

Strategies:

  1. Expand their existing product portfolio
  2. Further develop their R&D capabilities: Intends to expand R&D facility at Vadodara and utilise 1,887.00 square meters of the available land for the same
  3. Increase wallet share with existing customers and continued focus to expand customer base
  4. Expand their existing manufacturing capacities to capitalise on industry opportunities

Currently, Production capabilities are underutilised at 65% utilisation.

Shareholding pattern before & Post the IPO:

Risks:

  1. Adherence to quality standards demanded by their institutional customers is a non negotiable.
  2. RM pricing risk as there are no long term contracts with the customers & most of the RM are crude derivatives. 
    1. Their cost of raw materials consumed was ₹ 1,509.12 million, ₹ 1,461.59 million, and ₹ 1,182.92 million, which represented 50.24%, 55.52%, and 57.34% of their revenue from operations in Fiscals 2021, 2020, and 2019, respectively. 
    2. The expenditure incurred in respect of their top 10 suppliers was ₹ 766.50 million, ₹ 897.91 million, and ₹ 566.98 million, contributed 48.64%, 58.40%, 48.57%, respectively, to the purchases of raw materials and components during the year in Fiscals 2021, 2020, and 2019.
  3. 45% of the proceeds are fresh issues & 55% are for Offer for sale. The fresh issue proceeds will be used for the proposed expansion of the Dahej facility & the up-gradation of the R&D center: Cost overruns are a risk.
  4. Customer concentration risk: Dependent on a limited number of customers for a significant portion of their revenue.
    1. Their top 10 customers contributed ₹ 1,801.74 million, ₹ 1,538.47 million, ₹ 969.37 million, which accounted for 59.99%, 58.44%, and 46.99%, respectively, to their revenue from operations in Fiscals 2021, 2020, and 2019. 
  5. Fire risk: Manufacturing processes involve manufacturing, storage and transportation of various hazardous and flammable substances.
  6. High Competitive risk: If they do not compete successfully by developing and deploying new cost-effective products, processes, and technologies on a timely basis and by adapting to changes in their industry and the global economy, there could be a material adverse effect on their business.
  7. Customers facing demand risk in their businesses.
  8. Increasing working capital as the business grows.
    1.  In Fiscals 2021, 2020 and 2019, the working capital expenditure incurred by us was ₹ 662.35 million, ₹ 450.49 million and ₹ 417.32 million, respectively, which constituted approximately 22.05%, 17.11% and 20.23% of their revenue from operations, respectively.
  9. Business is bulky in nature, inventory will remain high.

Financial Statements

Balance Sheet

  • Borrowing under control, current capital raise & cash flows would be enough.
  • Working capital is increasing with the business growth.
  • PP&E has doubled in the last 3 years.

Profit & Loss

  • The huge growth in the bottom line due to a jump in gross margins over the last 3 years.
  • Top Line growth has been lower than PP&E; there could be an asset turnover effect in the upcoming years.

Cash Flow Statement

  • EBITDA to cash conversion has been very low at 30-40%
  • Capex will be high in the upcoming years: could affect return ratios going forward.

Outlook: Given the valuations of the IPO at the upper band are at 8x Price to sales, 33x Price to EBITDA & 45.9x Price to Earnings, we have an Avoid on this IPO given the huge working capital requirements required in this business to scale up its business.

Questions that were asked to the management in the IPO meet?

  1. What has led to gross margins increasing from 43% in 2019 to 50% in 2020? How much of Raw material cost increases have we been able to pass on & what’s the usual time lag?
  • Changing in product mix has led to higher GMs
  • Key price increases were passed on.
  • Management says that the volume increase was similar to revenues increase: find it confusing as they said that they increased the realisations too.
  1. What led to a dip in Germany rev as a % of sales from 27% to 1.4% in the last 3 years? As a corollary, what led to the jump in Chinese rev as a % of sales from 6% to 18% from 2019 to 2021?
  • Some supply chain changes which led to germany being of higher sales
  • No other player makes their products in China.
  1. “We have not been in compliance with certain statutes and rules in the past.” & we observe that there have been some petty fines regarding these; what has the management done to ensure that this doesn’t happen again?
  • A Mistake made by the auditor, they have assured that they will follow all the requisite rules going forward.
  1. What we have observed recently is that a lot of specialty Pharmaceuticals, agrochemicals & CDMO players are augmenting their R&D team. Have you seen any inflation in the cost of a scientist?
  • No pricing inflation & high availability of scientists
  1. Your R&D spends look quite low at less than 5cr every year, how tough is it for a new competitor or a customer to enter into the business by backward integration?
  • Took them 11 years to launch most of the products in 2018.
  1. What is the average asset turnover in your business & thus what will be the peak potential sales after the new expansion in Dahej is complete?
  • It was 1:4 before, now it will be near 1:3 (as the speciality products % have increased)
  1. EBITDA to cash conversion has been very low at 30-40% due to huge increases in WC as the business has grown. What are the plans to control working capital or is it just a part of business?
  • Part of the business, inventories & thus Working capital will remain high. The sales are bulky from month to month.

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