Tatva Chintan IPO is a reasonably good play on specialty chemicals story

Tatva Chintan Pharma Chem is in an industry sweet spot. Specialty chemicals were in the limelight over the last few years as global demand was robust. However, the pandemic disrupted chemical supply chains as China decided to get tough with local companies on environmental norms. The result was a situation when most global buyers of specialty chemicals opted to spread their China bets by including India in their shopping list. It is in this background that the Tatva Chintan IPO must be viewed.

Also Read: Apply for Tatva Chintan Pharma IPO 

Key terms of the IPO issue of Tatva Chintan Pharma Chem

The total issue size of Rs.500 crore will consist of a fresh issue of Rs.225 crore and an offer for sale or OFS by promoters to the tune of Rs.275 crore. Tatva Chintan will use the new issue proceeds to expand its manufacturing facility at Dahej and also spruce up its R&D unit in Vadodara. It also has another manufacturing plant at Ankleshwar in Gujarat.

Data Source: IPO Filings

Understanding the business model of Tatva Chintan Pharma Chem

Here is gist of the product and business highlights of Tatva Chintan Pharma Chem, a specialty chemicals player based out of Gujarat.

• Tatva Chintan product portfolio is spread across four verticals. This includes structure directing agents (SDA), phase transfer catalysts (PTC), electrolyte salts and pharmaceutical intermediates. It counts the who’s who of pharma industry among its clients roster, both in India and abroad.
   

• While pharma intermediates have been seeing a lot of stocking by pharma companies, PTCs have major applications in green chemistry and sustainable technologies. This can be a major asset in the post-fossil fuel scenario.
   

• Tatva is a strong player in PTC, SDA and PASC in the domestic and also the global market. In fact, Tatva exports to over 25 countries including the US, China, Germany, Japan, South Africa and the UK.

Tatva Chintan – Financials are fairly alluring

The company has presented a strong growth story and has been largely a macro beneficiary of the robust performance of the specialty chemical stocks. Sales grew from Rs.206 crore in Fy19 to Rs.301 crore in FY21. If you look at the EBITDA in FY21, it has more than doubled over FY19 to Rs.72 crore resulting in the EBITDA margins expanding to 23.85%.

Tatva Chintan saw net profits growing by 2.5 times between FY19 and FY21 to Rs.52.3 crore, even as net margins doubled to 17.40%. Both the ROE and ROCE are above 31% and have gained nearly 600 bps in the last 2 years.

Take a macro investment view on Tatva Chintan

1. With strong domestic demand and global companies hedging against China, Tatva Chintan IPO can be a good macro bet on chemicals as a medium to long term structural story. However, competition is likely to get stiffer in the coming years.
    

2. The IPO price band values the stock at over 40X P/E ratio on FY21 EPS. However, if the company can even sustain half its EPS growth rate of 60%, this P/E can be justified. The industry average for specialty chemicals is closer to 70.

In a nutshell, look at Tatva Chintan as a macro play on specialty chemicals industry. That is surely a structural story for investors.