IPO Analysis: Neogen Chemicals

IPO Rating - 42 (Risky)*

About the Issue

Neogen Chemicals (NCL), a Mumbai based company engaged into manufacturing of speciality chemicals is hitting the primary capital market with its initial public offer (IPO) of equity shares of Rs 10 each.  The price band has been fixed between Rs 212 and Rs 215.

The issues comprises of a fresh issue aggregating up to Rs  70 crore, which means issue of around 32.5 lakh shares at upper price band and an offer for sale of up to 2,900,000 equity shares by existing shareholders. Out of this 1,699,600 equity shares is being offered by Haridas Thakarshi Kanani (promoter selling shareholder) and up to 1,200,400 equity shares by Beena Haridas Kanani.

 Therefore, the issue size is between Rs 131.48 to Rs 132.35 crore at lower and upper price band respectively. The issue constitutes around 25.01% of company’s post-Offer paid up equity share capital at higher price band.

Out of the total issue size of Rs 132.35 crore at upper price band only Rs 70 crore will come to the company and that will be used for early redemption of 9.8 per cent FRCPS (fully redeemable cumulative preference shares), long term working capital, and general corporate purposes.  Company had allotted 1,070,000 9.8% FRCPS on October 4, 2016 to Karvy Capital, which will be redeemed from the issue proceeds.

About the company

NCL is engaged into manufacturing of bromine and lithium-based specialty chemicals. It started its business operations in 1991, at Mahape, Navi Mumbai with a few bromine-based compounds and lithium salts. Over the years company has expanded its range of products to 198 comprising of 181 organic chemicals and 17 inorganic chemicals.

The company’s product can be broadly divided into two categories that are organic chemicals and inorganic chemicals.

Organic Chemical: These are chemicals containing carbon in combination with hydrogen, and, or, other elements. These chemicals find their application in industries such as pharmaceutical, agrochemical, flavor and fragrance and electronic-chemical. Company market and sell products in India and exports primarily to Europe, USA and Japan. For the nine month ending December 2018, organic chemicals recorded revenue of Rs 126 crore, which forms 78.65 per cent of the total revenue.

Inorganic Chemical: These are chemicals with an ionic bond. The company’s offering in this segment primarily comprises of Lithium Compounds. These chemicals are used in Vapor Absorption Machines (VAM) for cooling air/water/process equipment and find application in industries such as heating ventilation and air-conditioning (HVAC) and refrigeration, construction chemicals, pharmaceutical and specialty polymer. For the nine month ending December 2018, inorganic chemicals recorded revenue of Rs 34.1 crore, which forms 21.35 per cent of the total revenue.

 Financials

 For the period between 2014 and 2018 company’s revenue recorded a CAGR of around 20% and was at Rs 164 crore for FY18. The EBITDA in the same period grew by 26 per cent to Rs 29 crore for FY18 and profit of the company grew annually by 30% in the same period to Rs 10.5 crore at the end of FY18.  

For the nine month ending December 2018, the company’s total turnover stood at Rs 159 crore and profit at Rs 12.2 crore, which is above its FY18 profit.

 Although company’s performance is looking good in terms of growth, there is one problem, its rising debt. Its short term borrowings have increased from Rs 19 crores to Rs 67.7 crores between FY14 and December 2018. The long term borrowing in the same period has increased from Rs 4.8 crore to Rs 44 crores. This has resulted into weakening of the financial condition of the company. The net debt to equity ratio has increased from 1.2x to 1.82 in same period. Compare this with other listed peers that are literally debt free. The net profit margin of the company is also in single digit.

All the figures are in crore other than EPS

 Valuation and recommendation

At the higher price band of Rs 215, the offer is demanding market cap to sales (FY18) of 3.0 times, which is lower than the Paushak of almost 6 times and equal to Atul of  3.14 times. In terms of PE, the offer is made at around 30 times after annualising its 9MFY19 EPS and post dilution of equity. This is in line with other listed peers and however, expensive to some of larger players.

 Looking at the weak balance sheet along with fair valuation, we believe that nothing is left in the table for subscribers and hence it is risky to invest in the issue.  

 *40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment