Tatva Chintan – A catalyst for growth

hi folks! haven’t seen you all discussing the stock quite much in recent times.
I came across this stock when it IPOed but I didn’t invest although liked its characteristics.
I recently bought the stock at around 990rs.
Why now? Let me introduce you’all to my thought process

I have an experience of around 3 years in the markets, and when I started in the markets at that time the hot stocks were pharma and chemicals, so invested a lot of money there and on net levels didn’t make any return.
Things I learnt from my first sectoral cycle :
1.Valutions matter
2.Brokerage reports are sales reports
3.Never invest at peak margins, peak earnings, peak valuations (even if its a structural business, look for temporary headwinds to invest so that you can get a good valuation multiple)

“Its the earnings that break or make the narrative. I like to be placed in a stage where the earnings start the narrative. and its the narative that gives you speculative returns alongside earnings growth” ~ me

Lets apply my learnings to Tatva Chintan while looking at some ratios:

1. The business is trading at 3.25x Price to Book , Average ~ 7x
2. RoCE less than 10% for 2 years now.
3. OPM (17%) lower than average ~ (20%)

Now it clearly shows that the stock is going through an earnings downcycle and the stock is falling continuously but I believe enough pessimism has been built enough around it. I have made a tracking position.

How I think differently from the market at this point is:

1. I think the revenue has bottomed out in FY24 (0.9x asset turns, 2.6x asset turns bull times on a much smaller asset base)
2. I could be completely wrong with the first point so let’s check survivability – the business has no debt (due its recent equity dilution xD) and lil cash too so I think it can survive in one year of downturn.

Now lets look at optionalities :

1. A large part of revenue can come from the other part of business (PASC – molecules commercializing) in next 1 year (biggest and only optionality for me) (management has guided for next 6 months but I have also taken a cushion of another 6 months in my assumption), one must note that in the previous bull run of the stock it was the SDAs (major part of business) which gave a splendid performance. it would be a blue-sky situation if both PASC and SDAs do well from here.
2. Euro 7 norms to tentatively start from next 1.5 years.(good for SDA business division)
3. China’s GDP showing signs of lil recovery. (GDP growth and Commercial Vehicle sales are correlated) (good for SDA business division)

Risks:

1. The working capital cycle is very baddddddd. (which makes me not be a permanent owner of the business) (I just want to play out the cycle in this business)
2. Change in end use of the application (I am unaware on this, neither the management has told me anything about it. sus)(still let’s hope for the positive)
3. PASC molecules do not commercial (I will sell immediately)

I have used simple principles of a cyclical investing approach for this business because I know my circle of competence. I cannot understand the chemical business because of their complexity.
fingers crossed, I am optimistic about the stock performance