Chemcon IPO Review | Positive & Negative Aspects

Chemcon Speciality Chemicals IPO Detailed Analysis

Introduction

The IPO of Chemcon Speciality Chemicals which serves Pharma and Oilfields industry, is open for subscription from today, Sept 21 to Sept 23, 2020. Lets analyse the Chemcon IPO outlook on Positive and Negative aspects.

Chemcon IPO Review | Positive & Negative Aspects

IPO Details

• IPO Date
  • Chemcon Speciality Chemicals IPO will open for subscription from September 21 to September 23, 2020
• IPO Size & Price Band
  • Chemcon IPO is expected to raise Rs.318 Cr, comprise of both Fresh issue and Offer for Sale
    • Fresh Issue : Rs.165 Cr, which is to be used for :
      1. Capex towards expansion of manufacturing facility : Rs.41 Cr
      2. Meeting working capital requirements : Rs.90 Cr
    • Offer for Sale : Rs.153 Cr, where
      • The company’s MD Mr. Kamalkumar Aggrawal and other member from Promoter Group Mr. Naresh Goyal are offloading their entire stakes 37.53% and 16.63% respectively. There was no private equity investor in the company.
      • Thus, Post IPO, the Promoter holding will come down to 74.47% from 100%
  • Price Band of the IPO is fixed at Rs.338-Rs.340 per equity share
    • While, the face value is Rs.10 per equity share
    • According to the above mentioned price band, the market capitalization of Chemcon will be approximately Rs.1,245 Cr (a small cap company)
• Lot Size
  • Investors can subscribe to the IPO by bidding for a lot of 44 shares, or in multiples thereof. Thus, Retail investors may need to bid for a minimum of Rs.14,960 worth of shares at the upper end of the price band.

Who are the Anchor Investors of Chemcon IPO?

• On 18 September, company allotted 28.06 Lakh shares to anchor investors at Rs.340 per share and raised Rs.95.40 Cr
• Major anchor investors are IDFC Mutual Fund, ICICI Prudential Gilt Plan, HSBC Global Investment Fund, Mirae Asset Healthcare and Equity Savings Fund, Tata Multi Asset Opportunists Fund etc.

Allocation Breakup & Subscription Status on Day 1

• QIBs : 50%, NIIs : 15% and Retail investors : 35%
• On day 1 (Sept 21), the entire issue has been subscribed 5.18 times. The IPO received bids for 3.4 Cr equity shares against offer size of 65.59 Lakh equity shares (excluding anchor book portion), the bidding data available on the exchanges showed.
• The category-wise subscription status on day 1 : Retail Investors : 9.8 times, NIIs : 1.24 times and QIBs : 0.04 times

Chemcon IPO Analysis – Positive & Negative Aspects

Positive Aspects

Company Overview – An Added Edge due to Speciality Chemicals Business

• As we know currently there is a lot of euphoria present in the markets for the specialty chemicals industry. Many Indian specialty chemicals companies tapped a good growth opportunities as an alternative for China and reported better revenue and profit growth since last 2-3 years.
• So, if a specialty chemicals company comes with an IPO, it is surely going to have an added edge from the investors being in the specialty chemicals business.
• Chemcon Speciality Chemicals Ltd (CSCL) is a specialty chemical company which serves 2 major industries – Pharma and Oil-field Industry. Lets see industry-wise product portfolio of the company.
• Pharmaceutical Chemicals :
  • The company is India’s largest and the only manufacturer of specialised chemicals, such as Hexa methyl disilazane (HMDS) and Chloro methyl Isopropyl Carbonate (CMIC). HMDS and CMIC are predominantly used in the pharmaceuticals industry.
  • These comprise of the chemicals which are utilized in the process of producing inter alia anti-viral and anti-bacterial drugs and a drug for treatment of tuberculosis, namely :
    1. HMDS and ancillary products (including hi-purity HMDS) – the only manufacturer of HMDS in India and were the third largest manufacturer of HMDS worldwide
    2. CMIC : It is largest manufacturer of CMIC in India and the second largest manufacturer of CMIC worldwide
    3. 4 CBC
• Oilwell Completion Chemicals :
  • These comprises of inorganic bromides which are utilized inter alia as completion fluids in the oil and gas exploration process, namely :
  • Calcium Bromide (solution and powder) :
  • Zinc Bromide (solution) – it is the only manufacturer of Zinc Bromide and the largest manufacturer of Calcium Bromide in India
  • Sodium Bromide (solution and powder)
• Thus, Chemcon Speciality Chemicals is present in a niche segment with a good presence in its business areas.

Industry & Financial Analysis

• Industry Analysis
  • The company operates on the Make in India theme.
  • All the chemicals are manufactured by the company in-house in India only. It has a manufacturing plant at Manjusar near Vadodara in Gujarat, 5 operational plants. And the company is planning to build 2 more manufacturing plants Pharma chemicals.
  • The specialty chemicals industry in India has high entry barriers due to the involvement of complex chemistry in the manufacture of products. Every specialty chemical creates a niche segment. So, it is very difficult for the other supplier to create the chemicals with same properties and application required by the customers.
• Revenue Mix
  • Company not only serves the domestic market but also export its products in overseas market such as USA, China, Japan, UAE, Serbia, Russia, Malaysia, and Azerbaijan.
  • Exports accounted for 39.78% to revenue in FY20
• Debt to Equity
  • The debt to equity ratio of Chemcon is 0.3, which is manageable. While the interest covergae ratio is at 14, indicating the ability of the company to repay interest from its regular operating cash flows.
• Attractive Valuations
  • Price to Earnings Ratio (PE) is 22 considering FY20 EPS, while ROCE of 37%, which is also very good.
  • Comparing valuation with Chemcon’s listed Specialty chemicals peers, PE ratios are : Neogen Chemicals (57), Paushak (37.6), Atul (29.6) and Aarti Industries (35.6) are trading in the 35-57 times range on FY20 EPS.
  • Chemcon’s premium in the grey market had risen to Rs.275 by Sunday evening from Rs.255 earlier that is, 81% more than the price band set for the IPO. It indicates the company is expected to get very good listing gains.

Negative Aspects

• High competition from China, though Chinese regulatory policy for chemical industry with pollution norms
• High Import dependence on Raw material which majorly comes from China
• Not a very fast growing Industry
• Revenue Decreased in March 2020 compared to March 2019. Even though revenue improved by more than 100% in FY19. There is no fixed sustainable rising growth trend seen for Revenue. Though revenue fell in FY20, PAT improved by almost 10%, which indicates the rise efficiency.
• It has a high client concentration : Top 5 customers contributed to 60% revenue in FY2020
• Consistently Decreasing ROCE Trend : 37.92% in FY20 vs 54% in FY19 vs 62% in FY18
• The Industry growth of the products is between 4-11%, so there are limitations for the overall revenue of the company, if the base industry is having lower range of revenue growth due to high competition from China.

Very Negative Aspects

• CBI criminal case going on against Mr. Naresh Vijaykumar Goyal
• Litigation on Insider trading by SEBI
• So, the promoter & promoter group’s corporate governance issue should make the investors cautious.
• While subscribing the issue, investors have to consider some risk factors like outbreak of coronavirus, geopolitical, social, legal and economic issues, increase in raw material prices, geopolitical tensions in the Asia-pacific region; delay in demand revival of oilwell completion chemicals etc.