Verdict: Long Term Attractive on Rising Capacity & Tax Breaks

Rs 500 cr IPO:

• 45% or Rs. 225 cr fresh issue for capacity expansion by 70% over 18 months and investment in R&D
• 55% or Rs. 275 cr OFS by promoters (100% stake to fall to 79%)

IPO Date: Fri 16^th Jul to Tue 20^th Jul 2021

Price band: Rs. 1,073-1,083 per share

MCap (at upper band): Rs. 2,400 cr, implying 21% dilution

Listing Date: 29^th July 2021

Specialty Chemicals Maker focused on Green Chemistry (Zero wastage)

Deriving 70% of Rs. 300 cr FY21 revenue from exports to US, EU, China etc., company is the world’s 2nd largest and India’s only commercial manufacturer of structure directing agents (SDAs) for zeolites, used in auto emission control. New emission norms in China from 2021 boosted Q4FY21 SDA segment sales to Rs. 56 cr from Rs. 64 cr in 9MFY21 and Rs. 102 cr in FY20.

40% revenue comes from SDAs, 30% from phase transfer catalysts (PTCs) used in improving yields and reducing process waste, and balance from pharma and agro API.  

30%+ RoE Supported by Tax Holiday

75% rise in installed capacity from 160 KL to 280 KL during FY19-21, increased company’s revenue from Rs. 206 cr to Rs. 300 cr, despite H1FY21 being soft (full year FY21 capacity utilisation fell to 70% from 90% YoY, unlike most peers) as one-third revenue is auto-dependent. With share of higher-margin, SDA segment is improving from 12% of revenue to 40% between FY19-21, EBITDA margin strengthened to 24% from 17%, as EBITDA doubled to Rs. 72 cr in the 2 years.

Since company enjoys 100% income tax holiday for Dahej SEZ plant, which accounts for 2/3^rd of present capacity, till FY22 and 50% till FY27, effective tax rate for FY21 was only 14%, leading to strong net margin of 17%. On a small equity base of Rs. 20 cr, EPS for FY21 stood at Rs. 26, up from Rs. 19 YoY.

70% Capacity Rise by Nov 2022

Fresh issue proceeds of Rs. 150 cr will be used towards capex at Dahej, to increase installed capacity from 280 KL to 480 KL over next 16 months. New facility will also enjoy tax breaks towards 50% of profits till FY27. Thus, company’s net profits can potentially double by FY24, on higher revenue and lower effective tax rate of ~18% between FY23-27.  

Valuation Attractive on Peer Comparison

Excluding Rs. 4.5 cr forex gain of FY21, historic PE multiple works out to 45x, which appears fully priced, given small scale of operations. However, high growth visibility on better utilization in FY22 and rising capacity subsequently coupled with healthy margin (both net profit and RoE) make the issue attractive, as FY22E PE multiple is about 36x, lower than 45+ PE of specialty chemical peers Aarti Industries, Anupam Rasayan, Rossari, Neogen, Laxmi Organic, Paushak among others. While company is not cash rich like some peers, debt equity ratio of 0.2:1 post IPO is not worrisome.

Conclusion:

Ongoing capex, attractive tax breaks and healthy margins, make the fundamentals sound. Valuation multiple on historic basis is in-line, but attractive over the medium term. Hence one may apply in the IPO with a long term view.

Grey Market Premium (GMP) of Tatva Chintan Pharma Chem: Grey Market Premium of Tatva Chintan is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.

Disclosure: No interest.