Tatva Chintan Pharma Chem
Tatva Chintan Pharma Chem is coming out with a 100% book building; initial public offering (IPO) of 46,59,831 shares in a price band Rs 1073- 1083 per equity share.
Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
The issue will open for subscription on July 16, 2021 and will close on July 20, 2021.
The shares will be listed on BSE as well as NSE.
The face value of the share is Rs 10 and is priced 107.30 times of its face value on the lower side and 108.30 times on the higher side.
Book running lead managers to the issue are ICICI Securities and JM Financial.
Compliance Officer for the issue is Apurva Dubey.
Profile of the company
The company 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 super capacitor 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. 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. As a manufacturer of specialty chemicals, it focuses on application of its products which form a key ingredient to its customers’ manufacturing and industrial processes. For instance, its SDA and PTC products have various applications in green chemistry, which is pertinent considering the growing focus on green and sustainable technologies.
The company continuously strive to improve its processes and infrastructure to help reduce its impact on the environment and have accordingly, undertaken various ‘green’ chemistry processes such as electrolysis. Considering the wide application of its products, it serve customers across various industries, including the automotive, petroleum, pharmaceutical, agro chemicals, paints and coatings, dyes and pigments, personal care and flavour and fragrances industries. Apart from company’s customers in India, it also export its products to over 25 countries, including the USA, China, Germany, Japan, South Africa, and the UK.
Proceed is being used for:
Funding capital expenditure requirements for expansion of Dahej manufacturing facility.
Funding capital expenditure requirements for upgradation at R&D facility in Vadodara.
General corporate purposes.
Industry overview
The Indian chemicals market is valued at $166 Bn (4% share in the global chemical industry) with the commodity chemicals accounting for almost 46%. It is expected to reach $280-300 Bn in the next 5 years, with an anticipated growth of 12% CAGR. The specialty chemical industry forms 47% of the domestic chemical market, which is expected to grow at a CAGR of around 11-12% over the same period. Agrochemicals and Fertilizers account for 18-20% of the domestic chemicals market and around 38% of the specialty chemicals domain which constitute of various differentiated chemicals used in the agro space including pesticides, herbicides etc. Pharmaceutical API make up for the second largest share of around 20% of the specialty chemical market with an anticipated growth of over 11% by 2024F. The Specialty chemicals industry is driven by both domestic consumption and exports. India’s specialty chemical companies are gaining favour with global MNCs because of the geopolitical shift after the outbreak of Covid-19 as the world looks to reduce its dependence on China. Currently China accounts for 15-17% of the world’s exportable specialty chemicals, whereas India accounts for merely 1-2% indicating that the country has large scope of improvement and widespread opportunity. It is anticipated that Specialty chemicals will be the next great export pillar for India.
The ‘Make in India’ campaign is also expected to add impetus to the emergence of India as a manufacturing hub for the chemicals industry in the medium term. Through incentives, subsidies and grants under this campaign, Indian companies could gain further ground as companies would want to reduce dependence on China after the COVID-19 pandemic and shift their supply chains. The decline in raw materials prices could also help the margins and reduce working capital need. However, input costs are a pass through for most companies and benefits could be limited. Overall, the specialty chemicals industry is likely to continue to perform well in the near to medium term and is expected to capitalize on the Make in India benefits to assume leadership position in the market.
Pros and strengths
Leading manufacturer of structure directing agents and phase transfer catalysts: With very few players in the Indian and global market, the company is the largest and only commercial manufacturer of SDAs for zeolites in India. It also enjoys the second largest position globally. Its strategically located manufacturing facilities and robust and technically sound R&D capabilities have enabled it to maintain the quality of its products. Its large manufacturing capacity, consistent growth, experienced management, global footprint, and high-quality products makes it a reliable supplier of SDAs and PTCs. The company’s key chemistries and products are gaining importance in the global market. The global production of tetramethyl ammonium hydroxide was valued at around $1.2 billion in 2019. Having multiple applications, to inhibit nanoparticle aggregation, the tetramethyl ammonium hydroxide market is expected to grow at over 7% CAGR through 2020-25F with Korea and China dominating the market. However, with just 2-3 players in the domestic market, the company stands an opportunity to expand and explore the global market.
Global presence with wide customer base across various industries: The company supply its products to customers in India and export its products to over 25 countries, including the USA, China, Germany, Japan, South Africa and the UK. During the Fiscals ended March 31, 2019, 2020, and 2021, exports of products exports of products amounted to Rs 1,435.19 million, Rs 2,020.20 million and Rs 2,119.92 million, which accounted for 69.57%, 76.74% and 70.58% of its revenue from operations, respectively. It also has two wholly owned subsidiaries in the USA and Netherlands, to facilitate its overseas operations. In addition, it participate in various domestic and international industry specific exhibitions and advertise in industry magazines, weekly and daily publications in USA, Europe and India. The specialty chemicals manufacturers enjoy strong entry barriers in the form of vendor acquisition, lengthy and complex product approval, registration process, customer loyalty among others. These barriers help companies ensure sustainable growth. Further, a distinguished and resilient business model is also a unique driver for these companies.
Modern manufacturing facilities with focus on ‘green’ chemistry processes: The company operates through two of its manufacturing facilities situated at Ankleshwar and Dahej. Its manufacturing facilities are strategically located close to the Hazira port thereby enabling its export and import operations and providing it a cost and logistics advantage. The Ankleshwar Manufacturing Facility and Dahej Manufacturing Facility, which was established in 1996 and 2017 respectively comprises reactors, Assembly Lines, ANFDs, centrifuges, and RCVDs, with the necessary supporting infrastructure and utilities. It has also employed the latest available technology such as ANFDs which has helped improve its productivity and the quality of the products manufactured by it. These Manufacturing Facilities employ advanced analytical equipment that indicate impurities up to PPM levels, which enable it to certify its products as ‘ultra-pure’ grade.
Diversified specialised product portfolio: The company has, over the years, diversified, expanded, and evolved its operations into manufacturing of pharmaceutical and agrochemical intermediates and other specialty chemicals, which have diverse applications across various industries. The expansion of its product portfolio is primarily driven by the continuously evolving needs and R&D initiatives undertaken by its customers, which is further supplemented by its R&D capabilities. Most of its products form part of the base raw materials required for the manufacture of products by its customers. Accordingly, in instances where its customers seek to expand their product offerings, as part of their ongoing R&D, they request it for new products and chemicals to supplement their ongoing R&D. Its strength lies in the quick turnaround in developing the product sample, following receipt of request of the new product.
Risks and concerns
Depend on limited number of suppliers for certain raw materials: The company currently rely on limited number of suppliers to provide certain raw materials. It does not have long-term agreements with such suppliers, and the loss of one or more of such suppliers or a reduction in the amount of raw materials it obtain from them could have an adverse effect on its business, results of operations, financial condition and cash flows. Its reliance on a select group of suppliers may also constrain its ability to negotiate its arrangements, which may have an impact on its profit margins and financial performance. Its suppliers could fail to meet their obligations, which may have an adverse impact on its business and results of operations. The deterioration of the financial condition or business prospects of these suppliers could reduce their ability to meet its requirements and accordingly result in a significant decrease in its revenues. Further, there can be no assurance that strong demand, capacity limitations or other problems experienced by its suppliers will not result in occasional shortages or delays in their supply of raw materials and packing material.
Derive significant portion of revenue from few customers: While the company typically have long term relationships with its customers, it does not have long term agreements with them. The success of its business is accordingly significantly dependent on it maintaining good relationships with its customers and suppliers. While the company has a number of customers, it is dependent on a limited number of customers for a significant portion of its revenue. Its top 10 customers contributed Rs 1,801.74 million, Rs 1,538.47 million, Rs 969.37 million, which accounted for 59.99%, 58.44%, and 46.99%, respectively, to its revenue from operations in Fiscals 2021, 2020, and 2019. The actual sales by the company may differ from the estimates of its management due to the absence of long term agreements. The loss of one or more of these significant customers or a reduction in the amount of business it obtain from them could have an adverse effect on its business, results of operations, financial condition and cash flows.
Manufacturing facilities concentrated in single region: The company’s manufacturing facilities are located in Ankleshwar and Dahej in Gujarat. Consequently, any significant social, political or economic disruption, or natural calamities or civil disruptions in this region, or changes in the policies of the state or local governments of this region or the Government of India, may require it to suspend its operations, either temporarily or permanently, incur significant capital expenditure and change its business strategy. The occurrence of, or its inability to effectively respond to any such event, could have an adverse effect on its business, results of operations and financial condition.
Operate in competitive business environment: The specialty chemicals industry is highly competitive. Competition in company’s business is based on pricing, relationships with customers, product quality, customisation and innovation. It expects that competition will continue to intensify both through the entry of new players and consolidation of existing players. Its competitors may succeed in developing products that are more effective, more popular or cheaper than any it may develop, which may render its products obsolete or uncompetitive and adversely affect its business and financial results. Some of its competitors may have greater financial resources, better distribution network, technical and marketing resources and generate greater revenues, and therefore may be able to respond better to market changes than it can. Further, its customers operate within highly competitive industries, where they are constantly required to adapt to factors such as changing consumer preferences, consolidation and the entry of new regional and local players, and constantly exert downward pricing pressure. It may be adversely affected in case its customers are unable to effectively respond to any factors that adversely impact the competitive landscape of their industries.
Outlook
Incorporated in 1996, 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. It is among the largest manufacturer of SDAs for zeolites in India. The company 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 25+ countries all over the world such as the USA, Germany, South Africa, China, and the UK. The company’s R&D efforts are mainly focused on development of new products, improvement of its existing production processes, adoption of advance production technology, and improvement of the quality of its existing products. Its experienced and dedicated management team also enables it to capture market opportunities, formulate and execute business strategies, manage client expectations as well as proactively manage changes in market conditions. It has demonstrated consistent growth in terms of revenues and profitability. The company requires working capital to finance the purchase of materials and for manufacture and other related work before payment is received from customers. It has invested a significant amount in research and development in recent years. However, investing in research and development, developing new products and enhancing existing processes is expensive and time consuming, and there is no assurance that such activities will result in significant new marketable products or enhancements to its products, design improvements, cost savings, revenues or other expected benefits.
The issue has been offered in a price band of Rs 1073-1083 per equity share. The aggregate size of the offer is around Rs 499.99 crore to Rs 504.65 crore based on lower and upper price band respectively. On the performance front, the company’s total revenue increased by Rs 416.70 million, or 15.75% from Rs 2,646.22 million in Fiscal 2020 to Rs 3,062.92 million in Fiscal 2021. Its profit after tax increased by Rs 144.73 million or 38.30%, from Rs 377.89 million in Fiscal 2020 to Rs 522.62 million in Fiscal 2021. The company plan to continue to increase offerings in its current business segments as well as diversify into new products by tapping into segments which in the view of its management have attractive growth prospects. For instance, it intends to increase its focus on products manufactured using continuous flow chemistry processes as well as electrolysis processes, as these will be more sustainable and are good value propositions. It intends to draw on its experience, market position and ability to timely deliver quality products to successfully foray into other sectors as well as to other geographies.
