Tatva Chintan’s Q3FY23 revenue rose 15% YoY / 34% QoQ to Rs1.2bn as SDA revenue recovered to Rs0.6bn, up 6.4% YoY / 5.7x QoQ. However, non-SDA segments, which hitherto performed well, dipped QoQ. The disappointment come from an 800bps QoQ contraction in gross profit margin to 43.8% due to higher bromine and solvent prices, which have subsequently corrected.

The company has refrained from taking price hikes as it opted to support European customers who suffered from unfavourable currency movements. SDA prices have been stable in Q4-TD. Tatva Chintan expects SDA revenue to be further boosted as Chinese customers resume purchase likely from Q1FY24.

Margins too are likely to completely recover in Q1FY24E as Q4FY23E will be impacted due to existing inventory of high-cost solvents. Company is in the process of commissioning its new plant, which is expected to start commercial production from Feb’23 and likely to double the total revenue in next 2-3 years. It will take another 30 months for the company to commission the plant on land purchased in a non-SEZ area.

SDA revenue recovers; non-SDA segments dip. Tatva Chintan’s Q3FY23 revenue rose 15.2% YoY (33.9% QoQ) to Rs1.2bn and came above our estimates. The revenue growth was led by recovery in SDA segment, which rose 6.4% YoY (5.7x QoQ) to Rs567mn with normalisation of inventory in the value-chain, and opening-up of China. However, complete recovery is anticipated in Q1FY24 as the Chinese customer, who is sitting on large inventory, also starts buying with recovery in the Chinese CV market. Company has started receiving approvals for Euro-7 compliant SDAs, which will help scale up the business significantly when developed countries adopt more stringent norms in CY25. Non-SDA segments, which have been strong in past two quarters, has moderated with: 1) PASC revenue growth of 14.4% YoY to Rs268mn (down 36.8% QoQ as one customer postponed purchase to April’23, and another customer didn’t buy due to bunched-up supply from China; 2) electronic chemical revenue was up 83% YoY (down 10.7% QoQ) to Rs40mn; and 3) PTC revenue grew 30.8% YoY (fell 0.4% QoQ) to Rs323mn.

Gross profit margin dipped 800bps QoQ to 43.8%. This was impacted due to two reasons: 1) sudden spurt in bromine prices, which again cooled-off quickly; the volatility impacted margins for PTC segment which uses bromine; and 2) solvents, which are used in SDA, saw major rise in prices which was not passed on to clients. Though the prices of commodity and solvents has subsequently reduced, the company anticipates another quarter of lower margins due to consumption of residual inventory of high-cost solvents. Prices of SDA have remained steady and the entire margin miss was due to volatility in commodity prices. EBITDA dipped 25% YoY (rose 60% QoQ) to Rs179mn. EBITDA margin stood at 14.9%, down 790bps. Other expenses fell 11% YoY to Rs244mn due to lower power and freight costs. Net profit declined 49% YoY (rose 64% QoQ) to Rs116mn.

New plant commissioning can potentially double revenue. Tatva Chintan has completed trial run in its new plant which is expected to start commercial production from 1st Feb’23. The new plant provides visibility to generate revenue of Rs9bn-9.5bn over the next 2-3 years. Company has already purchased fresh land for green field expansion; however, it may take 30 months for company to commission operations in green field project. Tatva Chintan has land available to commission a continuous flow plant in its existing Dahej SEZ plant; however, it will lack space for downstream products. Company believes the green field expansion will be utilised to secure supplies for existing products, but will largely be used for continuous flow chemistry and electronic chemicals.

Product pipeline remains strong: 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 supply of SDA for Euro-7, and onboarding a large new customer. New customer added last year is expected to increase purchase; products in pilot / R&D stages includes high-purity product and product used in plastic recycling; 2) company has supplied an initial quantity of electrolyte salt which is used in batteries for renewable energy; another customer has approved the electrolyte salt, but is also working on developing an electrolyte solution; 3) company is working on four products using continuous flow chemistry – including agrochemical KSM and intermediates, and monoglyme; and 4) company has received approval from two customers for bromine flame retardant.  

Other highlights. 1) The company has supported customers (European) with maintaining SDA prices despite commodity inflation as they have been already hurt from unfavourable currency movements. 2) The company is working on backward integrating for a key solvent, which will help further expand the margins, and also protect from volatility in commodity prices; and 3) The company expects margin to recover in Q1FY24 as Q4FY23 margins will be impacted by high-cost solvent inventory.