Tatva Chintan Pharma Chem Limited (TATVA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Tatva Chintan Pharma Chem Limited Q4 and FY '23 Earnings Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sanjesh Jain from ICICI Securities. Thank you. And over to you, sir.

Thanks, Lizen. Good evening, everyone. Thank you for joining on for Tatva Chintan Pharma Chem Limited Q4 and FY '23 Results Conference Call. We have Tatva Chintan management on the call represented by Mr. Chintan Shah, Managing Director; and Mr. Ashok Bothra, Chief Financial Officer. I would like to invite Mr. Dinesh Sodani, a GM, Finance, to initiate with the opening remarks, post which we will have a Q&A session. Over to you, Dinesh ji.

Thank you, Sanjesh ji. Good evening, everyone. On behalf of the management, I am pleased to welcome you all to Tatva Chintan's earning call to discuss results for quarter ended March 2023 and financial year ended 2023 results. Please note, a copy of our disclosures are available in the Investors section of our website as well as on the stock exchanges. Anything said on this call which reflects our outlook for the future or which could be construed as forward-looking statement must be reviewed in conjunction with the risk that the company faces. Today, from the management side, we have with us Mr. Chintan Shah, Managing Director; and Mr. Ashok Bothra, Chief Financial Officer. Now I shall hand over the call to Chintan sir for his opening remarks. Over to you, sir.

Thank you, Dinesh ji. Good evening, everyone and a warm welcome to the Q4 and full year earnings call of Tatva Chintan Pharma Chem Limited. We declared the audited results today, and we believe you have got a chance to go through the results and investor presentation uploaded on the stock exchanges as well as the company's website. During this quarter, the company reported the revenue from operations of INR 1,245 million, a growth of 26% year-on-year basis, whereas the full year revenue stood at INR 4,236 million, a decline of 2% year-on-year. Despite the challenging year, we are satisfied to have achieved this scale in terms of revenue due to sustained uptake in PTC, PASC segments and revival in SDA segment during the second half, which is reflected in numbers of this quarter. EBITDA during this quarter was at INR 163 million, a decline of 26% year-on-year, whereas the full year EBITDA was at INR 606 million, a decline of 44% year-on-year. The decline in profitability is largely on account of change in the product mix across business segments. During the quarter, the inventory other than spares and packing materials at consolidated levels have come down from INR 1,887 million as on September '22 to INR 1,325 million as on March '23. With the orders in hand for Q1 FY '24, we will consume all the excess inventory of SDA. In addition, the increase in finance cost during the year is largely on account of higher average cost of debt by 400 basis points and due to increase in benchmark rates. The annual repayments are the tune of INR 98 million. Now let me take you through our segmental performance during the quarter. PTCs have registered a revenue of INR 378 million in this quarter and a full year revenue of INR 1,432 million, contributing 34% of the revenue and a growth of 46% year-on-year basis during the FY '23. The offtake in PTC continues to grow with major supplies in overseas market. Electrolyte also have registered a revenue of INR 9 million in this quarter and a full year revenue of INR 165 million, contributing about 4% of the revenue and a growth of 191% year-on-year basis during the FY '23. The offtake from one of our large customer, which was on hold, the customer has instructed us to resume supplies from June '23. The pilot scale sample with another customer has now been formally approved and we shall execute the plan scale trial order by October '23. After receiving successful approval of our electrolyte solutions with another customer from the R&D scale, we are now working towards supplying material from the pilot scale. All the necessary setup has been created, and we shall begin the trials from the coming week. We also have an opportunity with 2 more customers on electrolyte solutions, and we are in final stages of submitting the R&D samples. FY '24 will be the year where couple of new customers shall go to a plant scale, and FY '25 is bound to witness robust growth in electrolyte space with these products getting into commercialization. Pharma and agro intermediates and specialty chemicals have registered a revenue of INR 299 million during the quarter and a full year revenue of INR 1,335 million, contributing 32% of the revenue and a growth of 31% year-on-year basis during FY '23. I'm happy to inform that for the new product in application area of metal extraction, the commercial supplies have been formally approved, and we are now negotiating the contract for commercial supply. In monoglyme, we could finally start the pilot trials with continuous flow chemistry. The initial results are encouraging, but we are also facing initial teething troubles as this is our first-hand experience in continuous flow chemistry. The issues have been identified and necessary modifications are underway. We expect to start a smooth pilot trial by the end of May '23. As far as our second product continuous flow basis is concerned, we have formally received the quality approval and now have begun production for a full-scale plant trial material. We plan to supply the plant skilled trial material by end of August '23, and we expect to begin commercial supplies from January '24. Now regarding our third product on continuous flow chemistry, which is the key base raw material for multiple agrochemical intermediates, we are steadily progressing on the development of downstream agrochemical intermediates. We plan to execute pilot trials on these new intermediates from December of '23 and commercialize these products by July of '24. We have received formal approval for yet another intermediate and are now executing the plant scale trial order for which the production has begun. We expect commercialization of this product from December '23. The above mentioned 3 products are getting into commercialization by the end of this financial year about Q4 of FY '24, which will provide opportunity of steep increase in revenue in the PASC segment. SDAs have registered a revenue of INR 549 million during this quarter and a full year revenue of INR 1,277 million, contributing 30% of the revenue and a decline of 43% year-on-year basis during FY '23. The demand for SDA is steadily coming back. We expect almost all the customers to come to a decent level by second half of FY '24. During the quarter, we supplied commercial trial orders for 4 different applications to one of the largest customers. The initial feedback is promising, and we expect a formal approval for 2 products by September '23 and for the other 2 products by December '23. The commercial supplies are expected to begin from January of 2024. Regarding the flame retardants, now we have formal approvals from 3 large customers. Due to low demand and drastically reducing raw material prices, most of the customers are adopting a cautious approach. So we expect this segment to be slow in the coming 2 quarters. Development of 2 new advanced flame retardants are progressing well, and we expect to pilot these products in Q1 FY '24. In April '23, the company has successfully commenced its commercial production from the new expanded facility at Dahej SEZ. Over the past decade, the Indian chemical sector has been growing rapidly. FY '23 had been a roller coaster year for most of the companies. Despite of all geopolitical uncertainties, the Indian chemical industry showed good resilience. Many of the challenges are set to persist in 2023 as well. Against a backdrop of fear of global recession and expectation of muted demand until half one of FY '24, Tatva Chintan continues to remain fairly optimistic on achieving reasonable growth. Most of the key raw material prices have dropped by 15% to 25%, which is also translating into reduced prices of the finished product. So this becomes a big challenge for us to achieve revenue growth. Also due to muted global demand across most of the sectors, we are seeing continuous cost pressures coming from the customers, which would translate into slightly lower spreads on margins. I feel Tatva Chintan is fortunate with the timing of launch of new products on commercial scale during this fiscal and also a good timing for a gradual rebound of the SDA demand. Despite of the challenging year ahead and even with the reduced product pricing, we anticipate to grow by 20% to 30% in FY '24. Also, we anticipate to slightly improve on the EBITDA margins due to forecasted change in the product mix. To conclude, I would like to mention that our entire team at Tatva Chintan are working rigorously with the commitment to scaleup the already developed approved products at a fast pace to turn them into profitable ventures. We shall strive to develop newer products using technology to ensure that we continuously provide high-purity products and innovative solutions to our customers. With this, I hand over the call to Mr. Ashok Bothra, our CFO, for financial highlights.

Thank you, sir, and good evening, everyone. I discuss -- I now discuss the financial updates for the quarter. Revenue from operation was INR 1,245 million versus INR 985 million in Q4 FY '22. That is an increase of 26% on Y-o-Y basis. Other income during the quarter was at INR 8 million, increased by 1.7x versus Q4 FY '22. During the corresponding previous quarter, Q4 FY '22, the [ end team forex loss ] was around INR 15 million, which was set off against the other income, that was around INR 18 million. EBITDA was at INR 163 million versus INR 220 million in Q4 FY '22. That is a decline of 26% on Y-o-Y basis. EBITDA margin was at 13% versus 22% in Q4 FY '22. The profitability has had an impact during the quarter and this year as a whole, largely due to higher raw material cost as a percentage of sales, employee costs, but that was partly offset due to reduction in logistic costs and to some extent, fuel cost. PAT was INR 170 million versus INR 175 million in Q4 FY '22, a decline of 3% on Y-o-Y basis. PAT margin was at 14% versus 18% in Q4 FY '22. The impact is on account of higher finance costs due to higher working capital requirement and increasing benchmark rates during the year. On our working capital side, our total working capital limits are INR 220 crores, and we have utilized to the tune of around 70%. During FY '23 exports stood at INR 342 million, contributing around 72% of the revenue. Tatva has a customer base spanning over 25 countries, including U.S.A., U.K., China, Germany, Japan and South Africa. During FY '23, the R&D expenditure was higher by 2.65x due to capital expenditure on account of recently completed R&D facility. Out of the net IPO proceeds of INR 2,072.81 million, INR 1,953 million have been utilized so far. That is 94% of the total funds have been utilized as on 31st March 2023. During the quarter, INR 26 million was utilized. That concludes an update on the financial highlights of Tatva Chintan. We now open the floor for question and answer.

[Operator Instructions] The first question is from the line of Nirali Gopani from Unique PMS.

Chintan, when I look at the company, I do understand that we are in a very dynamic industry, and we have 3 great leaders managing the company at the top of it. But recently, what is happening is that every quarter we feel like this is the bottom, and from here on it will only improve. But we always get negative surprises. So if you can share some thoughts on this?

Sure. Yes, you are absolutely correct that we have given a few negative surprises quarter-on-quarter basis. And I can assure you probably this was our last surprise. So we are seeing a nice robust demand coming back for the SDA. So if you understand, we had nearly about 50% revenue coming from SDAs in the previous financial year, which in this year has dropped to 30%. So that was a significant drop in that particular segment and which was the highest profitable segment for it. Even as of today, it is the most significant in terms of profitability. So with the drop in sales in SDA demand, which is for the known factors, so that is why all the surprises were coming on and on for last few quarters. But now I can assure you that the demand has come back quite steadily, and we will see a robust Q1, and going forward, we expect -- and this is also coming only from 2 customers, and we expect all the 4 customers to resume buying at a decent level from the second half of this financial year. So I hope this is the -- probably this is the last surprise, and we give you better surprises in coming quarters.

Right. But remember the last quarter, you had explained that we had some inventory, maybe intermediate, and that was the reason that we were seeing this pressure on the margin. So is the inventory entirely consumed in Q4 or a part of it will be also be continuing in Q1?

Entirely, we will consume within this month. So whatever we produce from end of May will be coming in from the newly procured materials. So we are consuming all the piled up inventory on SDA in this month. So probably the last dispatch we expect it to happen in last week of May from that inventory.

Okay. And obviously, your commentary on FY '24 revenue growth is very, very encouraging. But what you mentioned is that slight improvement in EBITDA margin. So can you give a range like what will be the EBITDA margin?

It should be in the range of between 18% to 20%.

Okay. Because last quarter, you had guided about 22%. So you feel a risk to that number?

Not necessarily because now the prices are getting adjusted on quarter-on-quarter basis instead of a year-on-year basis even for the SDA. So we can remain dynamic. See what has happened actually in this last 1.5 months, the price of -- I'm talking of 2 specific SDAs, which have prominent sales among all the product category. The raw material prices -- the key raw material prices come down from $19, today, it is being quoted at $13.5. So of course, the customer will also expect you to reduce the price because based on the pricing formula that you have. So when you are sitting on an old inventory, there are very less things that you can do about it but to accept the new pricing because it is based on the latest pricing of key raw materials where you have linked your prices. So this is something which is beyond the control. But once we are through with this inventory, then we are coming back with higher margins on this. So in terms of profitability or the EBITDA, the range remains the same and the pricing model that we adopt also continues to remain the same.

Right. And you are also talking about the new CapEx that we will need in a quarter or 2, you will start investing. So when will we start thinking on that line?

We should begin by end of this 2023. So that is when -- so we have actually already started planning and designing for the new facility. But we have time until the end of the year, and then we should start thinking about the execution of that project. Again, these plans got little wavy because of the current situation that the industry is in since last few months. And again, most of the customers -- I have been traveling a lot since last 2.5 months and meeting most of the customers in person. And what I feel is the market is set to rebound from the July or August of this year. Until then, people expect this downward trend in pricing to continue. So demand is not stable as of now. But we are fortunate that at this juncture, the SDA demand is coming back. So it will kind of set us off with this abnormal circumstances that are in the market right now.

Right. And flame retardants will also start contributing to the revenue meaningfully from this year?

Yes. From second quarter, yes. That is what most of the customers are expecting. So we already have certain orders in hand, which have been put on hold because if you follow the pricing of certain raw materials, the prices have dropped by nearly 35%. So the customers are also getting into a wait and watch mode that let these prices stabilize until then we are consuming the inventory pipeline. So we are also watchful about procuring new products. And in any case, the polymer industry is suffering with lower demand. So they have already a good pile up of inventory pipeline. So they are just in a wait and watch mode, that once this raw material prices stabilizes at some point in time, then they want to start procuring. So hopefully, this quarter, we may have very less demand in the particular category, but we expect Q2 to begin actual commercial sales on this. We are set to go. We have 3 customers who have formally approved, 3 large customers, actually. So we have been approved by 6 or 7 different customers, but 3 of them are notable customers. So we are set to go. As soon as the demand revise, we will start commercial production of this SDAs -- sorry, the flame retardants.

And my last question also -- I got disconnected in between. So did you comment on the tax rate? Like what happened? What was the adjustment in the quarter that we did?

It was lower taxes due to the completion of our R&D facility resulting in a lower tax rate.

We just started operating from our new R&D facility in Baroda...

And commissioning of admin building at our Dahej facility before March.

Okay. So that was a tax benefit that we had in the quarter?

Yes.

Okay. And for FY '24, what will be the tax rate for us?

So detailed working needs to be worked out. Ignoring this capital expenditure, effective tax rate will be around 17% to 18%, assuming profit from the Dahej and Ankleshwar plant will be in the ratio, say, 2:1.

Basically, Ankleshwar plant, we are under full tax, whereas Dahej plant, we'll continue to enjoy 50% tax benefits for the next 5 years. And all the growth that we perceive over coming years is only going to come from the Dahej plant because Ankleshwar facility is already supersaturated. So the Ankleshwar revenue will remain constant where it is, whereas the incremental revenues will only come from the Dahej facility. So on that incremental profits coming from Dahej, we will continue to enjoy 50% tax benefits for next 5 years.

[Operator Instructions] The next question is from the line of Sudarshan Padmanabhan from JM Financial PMS.

Sir, my question is to understand a bit more granular on the guidance. You see if I look at the first half, we have lost close to about INR 100-odd crores on the SDA side, which we have regained in the second half. And even if I assume that the 2 customers continue at the same run rate, I mean, that should give us additionally about 20% to 25% growth straight away. So are we being conservative in terms of our guidance? Because when we are talking about the view of continuous growth industry and the CDMO business firing, I mean it looks like we don't get basically baking in a very muted growth on the rest of the business [indiscernible] now the SDA?

This is -- see, honestly speaking, as of today, this is the correct guidance because if you think it in a correct perspective, I would say most of the prices -- with the reduction in raw material prices, your product prices are also going down, right? You cannot remain at the same levels. So your product pricing is also going down. So even within the month of April, we are seeing that typically, there is a reduction of 15% to 20% in most of the products that is happening. That doesn't mean that it is a reduction in your margins. It is just because the raw material prices are going down, you are also parallelly reduced or forced to reduce your product pricing as well. So when I say this year we did a revenue of let us say INR 400 crores, so next year to do that, considering today's pricing, we potentially have to have 20% higher sales to achieve the same revenue. So that is the bigger challenge. And despite of that, I'm saying that we will grow by 20% to 30%. So on a realistic basis, if considering that we are selling the products at the same price as what we did in March of '23, and typically, we are forecasting roughly about 50% growth, 40% to 50%.

Sure, sir. -- and the margins, I mean, even pass it on -- I mean, I understand that you will be having high cost inventory at least in the immediate term. But I'm just trying to understand if the 18% to 20% is the run rate that you're talking about for the full year, shouldn't the exit run rate be much higher than the 18% to 20%, say, in the fourth quarter of the second half? Because you would have depleted all the raw materials...

There are 4 large things that are happening typically from November onwards. So we will have 4 SDAs with a new customer going into commercialization, which is a large volume. Secondly, we have probably one of our largest products in terms of intermediates going into commercialization from January of '24. This is, again, considering that our plant scale trial material of 1 container gets up to, which we are expected to dispatch by July or August of this year. So assuming that the product gets approved -- of course, the pilot material has been approved, so we don't see much challenges. But considering that, then we are getting into commercialization of one of our largest intermediate space products, which will get into commercialization from January. So that is what we are negotiating right now with the customer for a contract for '24. So from January to December of '24. Again, we have -- we are currently producing one of the newly approved products we are producing on full container load of material. And this will again go into a planned scale approval basis. And this also we expect to have commercial production -- I mean, commercial orders beginning from November or December of this year. So most of these events are happening near the end of the financial year. So probably in next 7 to 8 months, we are just seeing incremental growth that would happen from the increase in sales in SDAs that we are anticipating. But the real sales that we will expect that we are forecasting to really grow in terms of real new business to happen, everything is happening post November of 2023.

The next question is from the line of Padma Raju Mathi from SBI Life Insurance.

Hope I'm audible.

Yes, sir.

Yes, sir. Chintan ji, just a few questions on the margins trend. Now if I see our gross margin sequentially, they have dropped by 400 bps. So just wanted to get some sense how much of this would you attribute it to the inventory loss? That is one. And with respect to this initial teething problems that we are talking in this continuous flow chemistry, has there been any cost associated with that in this particular quarter?

I would not have a very precise number about the impact on margin because of the older inventory. But to give you a ballpark figure, I would say to a tune of about INR 7 crores to INR 9 crores is what would be a rough estimate. So this doesn't necessarily include the products in inventory. Of course, the product is in inventory, but certain stages at the intermediate stages. And this, you have to reprocess the product, I mean, to do the further stages of chemistry with the increased raw material solvent prices that was happening. And now we have a different dimension beginning from end of March where suddenly the raw material prices have dropped. The solvent prices still remain to continue almost at the same level with 5%, 7% decline, but the raw material prices have declined sharply. So again, in this quarter, we have a number which is about INR 6 crores to INR 7 crores of impact on the profitability because of this inventory, which we'll selloff at a new price in the current one.

And any cost...

In terms of continuous flow chemistry, no. So these are minor -- these are operational issues that we -- it's a first time experience running certain chemistry at very high temperatures in a continuous flow basis. So certain pumping solutions had to be altered, certain heaters had to be replaced because of not giving you the constant high temperature requirements and stuff like that. So these are minor costs involved to that. The major cost involved to that is your time and opportunity.

Okay. And my next question is related to -- initially, you talked about customers being in wait and watch mode in both SDAs as well as flame retardants...

Not in SDA, only in flame retardants.

Yes, SDA retardants fall in raw material prices. So how -- I mean, how is the demand outlook in the other 2 segments in the PTCs and PASC?

PTC, PASC and SDA, we see a very good demand, and most of the businesses for up to December '23 have been locked. Most of them with the large customers. So I don't see much challenges on that part. The only challenging part remains is the prominent flame retardant product. And then also most of the customers we have been talking to actively, and they expect this to be quite decent mode from second half of this financial year. So probably by August or September is when we anticipate this to come back to a normalcy levels.

Okay. Last question from my side. Like from a CapEx point of view, how we should see this particular year? I mean, what would be the kind of CapEx spend?

Yes. So for the new product that -- for the new Agro intermediate that I talked to you about which goes into commercialization in '24 in a big way. So currently, we have infrastructure in place which cannot handle this volume. So we have certain missing parts on that. Again, as you are aware that this product also forms a part of our second product, which is on a continuous flow basis. So this product involves a part of the chemistry on a continuous flow basis. So we have to invest in 2 columns and maybe a couple of reactors. We are looking at about INR 16 crores to INR 17 crores of CapEx. That we -- and probably a running CapEx that keeps on happening, certain old equipment is being replaced or some things being discarded because of age and those factors. So potentially, we are looking at about INR 30 crores to INR 35 crores of CapEx during this financial year.

The next question is from the line of Dhruv Muchhal from HDFC Mutual Fund.

It seems you are seeing some good development in the second and third product in the pharma and the -- in the pharma segment. And most of the commercialization seems to be happening from November and December probably. So sir, how can we look at FY '25? Probably that would be a good year to look at for that segment. So probably if you can give some sense of what can be the revenue run rate then? Because it seems you have decent visibility on some of the products. So what can be the revenue run rate then be for the pharma segment?

So at current pricing levels -- probably this question a couple of months back if you had asked, I would have said 100% growth is what we anticipate. But today, I would post it around 75% to 80% growth from the recently completed financial year basis, yes.

All right. And then -- and it should gradually ramp up in FY '25, '26 to reach the full run rate in '26 probably?

So by that time, we should be pretty much close to consuming our new capacities as well, very close to that. We will be running at about 85% of occupancy levels by that time. That is why I'm saying that we'll have to think about starting the CapEx, at least by the end of 2023 or early '24.

Got it. And sir, the second thing is you mentioned about margins that are about 18%, 20%. And underlying revenue growth adjusting for the pricing of about 40-odd percent. So revenue growth of about 40%, adjusting for the pricing impact, which does not impact your EBITDA, but of course, impacts your revenue. So sir, because the next year, in FY '24, probably your mix for SDAs will also improve versus what it was in FY '23. So shouldn't -- so based on your guidance, it seems the revenue growth and the EBITDA growth is probably similar, 40%, 40%. Shouldn't the EBITDA growth be much better given...

This is a very logical question that you have asked. And the real answer to that is some of these EBITDA margins will be consumed by the BFR products because these are not very high margin product what we have launched recently. So this is the starting kind of a base product in terms of BFR. So when we go to the next stage is when the EBITDA margins becomes decent. So these products will consume some of the EBITDA margins of our other product categories.

Got it. And sir, quickly, on BFR flame retardants, what kind of utilization are you expecting in '24 and '25, probably '24? '25 seems early, '24?

Sorry, please repeat the question.

For FY '24, what kind of utilization are we expecting in the flame retardants? I think the capacity is 5,000-odd tonnes?

We expect about 40% of that consumption.

The next question is from the line of Yash Shah from Investec.

Sir, my first question was regarding the new products which we are launching in the current financial year. In FY '24, we have about 5 to 6 products which we are launching, which will basically contribute to majority of our incremental revenue. So sir, I just wanted to understand our thinking whenever we basically develop a new product or are commercializing it, what is the market size that we target? Or what are the internal parameters we have before we start developing a new product for a customer? So I wanted to understand that since majority of our value unlocking is going to come from about to be unlocked products.

So whatever we now undertake as a project has to have -- for us, a market of at least INR 40 crores to begin with in terms of -- so we are picking basically something which can give us a 10% growth. And the product should have a good long life and also a growth opportunity down the line. So of course, when you say the customer only gives you 20% or 30% of its overall demand as a new supplier, and then you have an opportunity to ramp it up to maybe 50% or 60% to their overall business requirements. So that is how we identify a product. So typically, when we talk of a new product, we intend with a minimum revenue of INR 40 crores. And of course, there is no limit on the upper side. But now whatever we are picking is with a far more higher revenue potentials. So this what we are going to commercialize now is not a work of today. It is the work has been going on since probably last 2.5 years or 3 years and which is now getting into a mode of commercialization.