IPO analysis: Chemcon Speciality Chemicals

IPO Rating - Invest

About the Issue

Chemcon Speciality Chemicals, a Gujarat-based manufacturer of speciality chemicals that find application in pharmaceutical and oilfield industry is entering the primary capital market with its initial public offer (IPO) of equity shares of the face value of Rs 10 each.  The price band has been fixed between Rs 338 and Rs 340.

The total issue size is of Rs 318 crore, including a fresh issue of Rs 165 crore and an offer for sale of Rs 153 crore shares by the exiting shareholders. At the upper price band of Rs 340, the company will issue up to 0.48 crore of equity shares, aggregating up to Rs 165 crore. After this issue, the promoter’s stake will come down to 74.5 per cent from 100 per cent before this issue.   

The proceeds from the fresh issue of IPO will be used to meet capital expenditures for expansion of manufacturing facility, meet business working capital requirements and for general corporate purpose.

The IPO will open for public subscription on September 21 and close on September 23.

About the Company

Chemcon Speciality Chemicals was originally incorporated as Gujarat Quinone Private Limited (GQPL) at Vadodara. Later in July 2004, the name of the company was changed to Chemcon Speciality Chemicals Limited post-GQPL merger with Chemcon Engineers Private Limited (CEPL), which was incorporated by the promoters in Vadodara in 1996.

The company is the only manufacturer of HMDS in India and is the third-largest manufacturer of HMDS worldwide in terms of production in the calendar year 2019 (source: Frost & Sullivan Report). The company is also the largest manufacturer of CMIC in India and the second-largest manufacturer of CMIC worldwide, in terms of production and capacity in the calendar year 2019 (source: Frost & Sullivan Report). Further, the company is the only manufacturer of Zinc Bromide and the largest manufacturer of Calcium Bromide in India, in terms of production in the calendar year 2019 (source: Frost & Sullivan Report).

Their manufacturing facility is located at Manjusar near Vadodara in Gujarat and currently, has 7 operational plants of which, 2 plants are dedicated to the manufacturing of HMDS and ancillary products, (including 1 plant dedicated to the manufacturing of hi-purity HMDS) and 1 multipurpose plant, which is currently being used for the manufacturing of HMDS & other pharmaceutical chemicals. Besides, 2 plants are dedicated to the manufacturing of CMIC and 2 plants dedicated to the manufacturing of its Oilwell Completion Chemicals, along with 3 warehouses for the storage of its products and raw materials.

The company not only serves the domestic market but also export its products in overseas markets such as USA, China, Japan, UAE, Serbia, Russia, Malaysia, and Azerbaijan. Exports contributed to 40 per cent to revenues in FY20 and grew at a CAGR of 18 per cent over FY18-20. 

The key customers of the pharmaceutical chemicals include Hetero Labs, Laurus Labs, Aurobindo Pharma, Lantech Pharmaceuticals, Ind –Swift Laboratories, Vivin Drugs & Pharmaceuticals and Macleods Pharmaceuticals. Shree Radha Overseas, Water Systems Specialty Chemical DMCC and CC Gran Limited Liability Company are some of the clients of its oilfield chemicals segment.

Financials

The company has witnessed healthy financial growth in recent years. Between FY18 and FY20, the company’s revenue increased at a CAGR of 29 per cent. It increased from Rs 157.64 crore in FY18 to Rs 262.05 crore in FY20. EBITDA in the same period grew by 25 per cent annually to Rs 70.26 crore at the end of FY20. Profit after tax saw a CAGR of 36 per cent between FY18-20 to Rs 70.26 crore in FY20. Nevertheless, continuous Capex has been incurred over the last three years and the return ratios have tapered down with a healthy ROE of 34.23 per cent at the end of FY20.

Valuation and our take

At the higher end of the price band of Rs 340 and on expanded equity base, the issue will be valued at the market cap to sales of 4.7 times, which is cheaper than some of its listed players that are trading at more than five times. In terms of PE ratio, the issue is demanding 25.5 times of FY20 earnings post its expanded equity, which looks attractive as compared to its peers that are trading at PE of greater than 30 times. Its speciality chemical peers such as Neogen Chemicals, Paushak, Atul and Aarti Industries are currently trading at PE multiples of 57.0x, 37.6x, 29.6x and 35.6x, respectively on FY20 EPS.

Therefore, we believe that the issue is attractively priced but undervalued as compared to its peers. Moreover, the industry, as well as the company, is well placed to see better growth in future and hence, we would recommend to 'invest' in the issue.