The initial public offering (IPO) of Tatva Chintan Pharma Chem opened for subscription on July 16 and was fully subscribed within the initial hours.
As the IPO momentum remains strong, specialty chemicals space has in particular caught investor fancy. Of the key factors playing out, global de-risking of the supply chain away from China holds remarkable promise for Indian companies. Fundamentally strong companies in the sector which went public recently have delivered sound returns. Rossari Biotech and Laxmi Organics have clocked more than 100 percent returns since listing.
If we analyse TCPC's business lines, the specialty chemicals manufacturer is engaged in specialised products finding application in diverse industries. These products are complex molecular structures that are used to aid complex processes while acting as solvents, catalysts, absorbents and reactants among others. TCPC's forte is SDAs (structure-directing agents), PTCs (phase transfer catalysts and electrolyte salts), along with PASCs (pharmaceutical agrochemical and other specialty chemicals).
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SDAs have a major use in synthesis of Zeolites used in catalytic reduction, a preferred technology for emission control in automotive applications. Rising demand for Zeolites globally makes SDAs and TCPC critical, given that it is the only company globally managing entire value chain of SDAs currently.
Sustainable opportunities hold promise for future
Electrolyte salts, currently insignificant from a revenue contribution perspective (1 percent in FY21), are used in supercapacitor batteries. While TCPC is the largest producer in India, the market is not large given the inability of companies to consume such products. However, given the growing focus on green and sustainable technologies, electrolyte salts hold significant potential.
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Leadership status in multiple categories allows TCPC to leverage existing strengths to capitalize on future opportunities. Simultaneously, the company continues investing in innovation and adoption of new technologies, reflected in the planned capex of Rs 170 crore towards manufacturing and R&D facilities. Also, the company will further leverage long-standing relationships and add more clients through existing subsidiaries in the US and Netherlands.
Strong financials | Attractive valuations
While the future is promising, TCPC has also delivered strong revenue growth and profitability. Revenues have grown at a CAGR of 21.7 percent over FY2019-21 to Rs 300 crore, while EBITDA margins have improved 600bps to 23 percent. Profit after tax has grown at a CAGR of 59.50 percent. Return ratios have also been strong with return on equity (RoE) and return on capital employed (RoCE) for FY2021 at 31.5 percent and 33 percent respectively compared to 25.8 percent and 26.4 percent in FY2019.
All in all, we believe TCPC IPO has received huge interest from customers given the company’s multiple strengths, helped by buoyant interest in specialty chemicals. It rates high in terms of financials, growth potential, dominant position and potential play on green chemistry. TCPC is available at a P/E multiple of 41.6x versus broader industry average of around 45x (see below). We recommend a ‘subscribe’ on the IPO for long term gains.
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