Tatva Chintan Pharma IPO: Key Points to Consider

The IPO market is geared up for a busy season with new age companies such as Paytm, Zomato, Mobikwik, among others, getting the necessary approvals.

The much-awaited IPO of online food delivery and restaurant discovery platform Zomato will open for subscription tomorrow.

One more company is coming out with its public offer later this week on Friday. Gujarat-based Tatva Chintan Pharma.

The initial public offer (IPO) of Tatva Chintan Pharma will open for subscription on Friday. The chemical manufacturer is looking to raise about Rs 5 bn from the primary market.

Here are some details about this IPO.

Issue period: 16 July 2021 to 20 July 2021

IPO Size: Rs 5 bn (fresh issue worth Rs 2.2 bn and offer for sale (OFS) worth 2.8 bn

Price band: Rs 1,073 to Rs 1,083 per equity share

Bid lot: 13 shares and in multiples thereof

Face value: Rs 10 per equity share

Object of the issue: The object of the issue is to fund capital expenditures and general corporate purpose

The stock will get listed on exchanges by 29 July.

About the company

Tatva Chintan Pharma Chem is a chemical manufacturing company that manufactures structure directing agents (SDAs), phase transfer catalyst (PTCs), pharmaceutical and agrochemical intermediates, and other specialty chemicals.

The company was incorporated in 1996 and is among the largest manufacturer of SDAs for zeolites in India.

It serves customers across industries i.e. automotive, petroleum, agrochemicals, dyes and pigments, paints and coatings, pharmaceutical, personal care, and others.

Its products are not only sold in India but also export to more than 25 countries all over the world.

Arguments in favour of the business

Leading manufacturer

Tatva Chintan Pharma is the leading manufacturer of SDAs and PTCs.

With the presence of very few players in Indian as well as global market, it's the largest and only commercial manufacturer of SDAs for zeolites in India. Globally, it is ranked second.

Strong presence in global market with barriers to entry

Tatva Chintan supplies its products to customers in India and exports to over 25 countries, including the USA, China, Germany, Japan, South Africa, and the UK.

During fiscals 2019, 2020, and 2021, export of products accounted for 69.6%, 76.7%, and 70.6% of revenues.

The company is involved in complex operations of manufacturing of products and production process. Hence, there's a high barrier to new entrants.

Also, its products are subject to very sensitive and strict product approval systems.

Diversified portfolio

Over the years, the company has expanded its product portfolio which is primarily driven by R&D initiatives.

As of 31 March 2021, the company offers 47 products under the SDA product portfolio, 48 products under the PTC product portfolio, 6 products under the electrolyte salts for super capacitor batteries portfolio, and 53 products under the PASC portfolio.

From the above, the production of SDAs and electrolyte salts requires strong expertise, hence the company has an edge.

Apart from the above, it also manufactures pesticides, fungicides, herbicides and other agrochemical products.

Risk factors

Covid impact

After more than fifteen months, Covid-19 pandemic, as we all know, still remains a key concern for all the companies. In case of Tatva Chintan, its manufacturing facilities were shut down.

Although governments are beginning to ease restrictions, the disruptions caused by the shutdowns may affect the company's financial condition.

Also, the company generate revenues from different geographies due to exports. It would take time to normalise the operations.

Production of specialty chemicals typically requires substantial water. Any interruption in the continuous supply of water and electricity may negatively impact the quality of the products which would result in loss of revenue.

Increasing costs

Raw material supply and pricing can be volatile due to a number of factors including demand and supply, general economic and political conditions, transportation and labor costs, natural disasters, competition, etc.

Tatva Chintan's primary raw materials include tertiary amines, alkyl halides, general solvents, and other general and fine chemicals.

In fiscal 2020 and 2021, the cost of raw materials consumed was Rs 1,509.1 m and Rs 1,461.6 m, which represented 50.2% and 55.5% of the revenues.

The company does not have long term agreements with most of their suppliers. Demand and supply can have an impact on the working capital and business.

Limited suppliers and customers

At present, the company relied on limited number of suppliers to provide certain raw materials, with whom they do not have long-term agreements.

In the absence of long-term supply agreements, there can be no assurance that a particular supplier will continue to supply products in the future.

The loss of one or more of such suppliers or a reduction in the amount of raw materials from them could have an adverse effect on the company's business operations.

Similar is the case for customers.

It's dependent on a limited number of customers for a significant portion of our revenue. The top 10 customers accounted for 60% of revenue in fiscal 2021.

The financials

In terms of revenues and profitability, the company has delivered good performance on both fronts.

It has increased revenues at a CAGR of 21.7% during the last three fiscals, from Rs 2,068 m in 2019 to Rs 3,062.9 m in 2021.

The bottomline has grown at a CAGR of 59.5%, from Rs 205.4 m in 2019 to Rs 522.6 m in 2021.

Financial Snapshot

(Rs m)	FY19	FY20	FY21
Revenues	2,068	2,646	3,063
Revenue Growth	-	28%	15.7%
Expenses	1,802	2,170	2,456
Net Profit	205	378	523
Net Profit Margin (%)	9.9%	14.3%	17.1%
Net Worth	797	1,177	1,660
Return on Equity (ROE)	388%	311%	318%

Data Source: Company's Red Herring Prospectus (RHP)

With decent financial position, the company is able to invest in capital expenditure. In fiscal 2021, the company incurred Rs 26.5 m worth of capital expenditure.

Peer comparison

On listing, Tatva Chintan Pharma will join peers such as Navin Fluorine, Aarti Industries, Alkyl Amines, Vinati Organics, and Fine Organic Industries.

Comparative Analysis

Company	Total Income	Net Profit	Return on Net Worth (%)
Tatva Chintan Pharma	3,063	523	31.5
Vinati Organics	9,801	2,693	17.5
Fine Organic Industries	11,503	1,200	16.5
Aarti Industries	45,068	5,230	15.2
Alkyl Amines	12,494	2,950	37.3
Navin Flourine	12,584	2,580	15.8

Data Source: RHP, Equitymaster
Figures in Rs m and as on 31 March 2021

For more details, check out Tatva Chintan Pharma's RHP.

Chemical sector IPOs

The pandemic has been a blessing in disguise for the chemical sector.

The stalling of imports from China in the last year translated to more buyers in India, who were otherwise buying from China.

This will be the fifth IPO by a chemical company in the past year after Rossari Biotech, Chemcon Specialty Chemicals, Anupam Rasayan, and the recently concluded Clean Science IPO.

The public issue of Clean Science and Technology saw a blockbuster response from investors, especially from qualified institutional buyers and non-institutional investors. The issue was subscribed 95.5 times.

While Clean Science is yet to list, other three are presently trading significantly higher than their issue prices.

Rossari Biotech is trading at Rs 1,194 compared to its issue price of Rs 425, up 181%.

Chemcon Specialty Chemicals is trading at Rs 502 compared to its issue price of Rs 340, up 48%.

Meanwhile, Anupam Rasayan is up 49% if compared with its issue price of Rs 555.

Given the rising demand for speciality chemicals, the outlook for the sector remains promising.

Indian manufacturers have benefited from a rise in demand from global customers who aim to reduce dependence on China.

How Tatva Science Pharma IPO performs on listing day remains to be seen.

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