Tatva Chintan Pharma Chem Stock Research Report by ICICI Securities
Sector: Speciality Chemicals
CMP Rs. 1829, Target Rs. 2110 (15% upside potential)
Target Period: 12 Months
Tatva Chintan Pharma Chem Stock Research Report: Near-term weakness weighs on FY25 guidance
Tatva Chintan’s Q4FY23 revenue rose 26.4% YoY to Rs1.2bn as SDA revenue recovered to Rs0.5bn, up 41% YoY. However, gross profit margin dip of 400bps to 39.8% was disappointing (partly from a change in product mix) considering the company has guided for a sequential improvement in margins. It has guided revenue growth of 20-30% for FY24 assuming a realisation drop of ~20%, EBITDA margin at 18- 20% on gradual recovery in demand and higher fixed cost towards the Dahej-2 plant. Tatva Chintan has guided EBITDA margin of 20-22% and 20-30% revenue growth to sustain in FY25 – we believe near-term weakness in margin has weighed on guidance for FY25. We see the potential for higher margins in FY25 due to the commissioning of continuous flow plant which has higher margins and capacity ramp up in Dahej-2. Notwithstanding the near-term weakness, we like Tatva Chintan due to its unique product portfolio, and strong pipeline which can drive faster growth on macro situation turnaround. We have cut our EPS estimates by 47% / 20% for FY24/FY25, respectively. Our estimates are higher than guidance. Accordingly, we have reduced target price to Rs2,110 (from Rs2,650; FY25E PE multiple of 30x). Maintain BUY.
● Guidance revision has led to significant EPS cut. Tatva Chintan had a challenging FY23 which was attributable to an external factor (drop in China CV sales). It was anticipating CV sales recovery and liquidation of high-cost inventory which would pave the way for normalisation of growth and margins. However, the company has now guided for 20-30% revenue growth (on low base) and 18-20% margin for FY24 which has been impacted due to lower raw material prices, and fixed cost associated to the commissioning of Dahej-2 plant. We believe FY25 margin guidance of 20-22% (earlier: 24-27%) was disappointing and seems very conservative despite new projects shaping up well, and they will be contributing to FY25 EPS. It appears near-term weakness has weighed on the guidance for the company, and looking at its past margin performance, we expect Tatva Chintan to beat its conservative guidance.
● Tatva Chintan Pharma Chem Stock Research Report: SDA revenue recovering. Tatva Chintan’s Q4FY23 revenue rose 26.4% YoY (3.2% QoQ) to Rs1.25bn and came below our estimates. The revenue growth was led by recovery in SDA segment, which rose 40.9% YoY (down 4.3 QoQ) to Rs543mn with normalisation of inventory in value chain. However, the company said only two customers have started buying SDAs, and other two may gradually add to volumes. It has started trial of SDAs with another large customer which may complete the validation process in FY24 and contribute to growth in FY25. New customer added in FY23 has started commercial purchases. SDA segment has started seeing a drop in realisation owing to the fall in key raw material prices which will hurt revenue for FY24. PASC revenue grew by 15.5% YoY to Rs320mn; electronic chemical revenue was down 39.3% YoY to Rs13mn; and PTC revenue grew 29% YoY (19.6% QoQ) to Rs386mn. The company has guided for lower revenue growth in FY24 on the assumption that realisation will fall by 15-20% on account of lower input cost; however, it remains confident of maintaining percentage spreads (gross profit margins) across product categories.
● Gross profit margin dipped 400bps QoQ to 39.8%. The company has guided for margin expansion sequentially during Q4FY24 earnings call; however, margins have dipped further impacted by product mix change, and high cost inventory. It said it will liquidate the entire high-cost inventory by May’23 with gross profit margin improving thereafter. Employee cost has increased by 25% YoY to Rs103mn, while other expenses dropped 20% YoY to Rs229mn. Consequently, EBITDA has declined 26% YoY to Rs163mn and EBITDA margin was 13.1% (down 180bps QoQ). PBT dipped 40% YoY to Rs114mn, while net profit grew 17% YoY to Rs205mn on tax rebate of Rs92mn. The company has guided 18-20% EBITDA margin for FY24, and 20-22% for FY25. The margins are impacted by 1) higher fixed costs for new plant commissioned; 2) company’s product spreads are as %age of revenue, therefore, the fall in raw material prices hurts absolute EBITDA (barring few products) and 3) demand weakness.
● Product pipeline remains strong: The company has a strong product pipeline across categories which increases visibility of revenue growth over the next three years. Products pipeline includes: 1) SDA – company is working on four SDA products with a customer; 2) it had a few issues in pilot trial for mono glyme and it expects to commence the trial again in May’23; 3) its three intermediate products are undergoing pilot trial, and commercial production may commence by end-FY24. These products have at least one stage using continuous flow; 4) company is in discussion for chemical for rare metal; 5) it has three large customers for bromine flame retardant (BFR); however, due to falling prices they have postponed the purchase. BFR prices have dropped to US$4.5/kg from US$8/kg; and 6) the company is working on electrolyte solution.
● Other highlights. 1) Company has guided for PTC revenue growth of 10%; SDAs revenue at FY22 levels; PASC to grow on new production commissioning and electronic chemicals to grow by 50-100%. 2) BFR revenue seen at Rs0.5bn for FY24 and at Rs2bn for FY25. These are based on current low realisation. BFR has now been approved with 6-7 customers of which three are large customers; and 3) FY24 capex is expected at Rs300-350mn.
● Risks. 1) Slower-than-expected revenue recovery; and 2) continued pressure on margins.
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