Laxmi Organic IPO Detailed Review | Should I Subscribe?

Detailed Analysis of Laxmi Organics IPO

Introduction

Laxmi Organic Industries Limited (LOIL), a chemical manufacturer, market leader in Acetyl Intermediated and Specialty Intermediates is coming up with the IPO of Rs. 600 crores, which is open for subscription from Monday, 15^th March 2021. Is this business good for long-term investment? Check it out by going through this detailed analysis of Laxmi Organics.

Detailed Review of Laxmi Organics IPO

1) IPO DETAILS:

1. Laxmi Organics IPO is open for subscription from 15^th of March 2021 to 17^th March 2021.
2. With the Initial Public Offering, Company plans to raise Rs. 600 crores from the market. IPO consists of fresh issuance of Shares worth Rs. 300 Cr. and offer for sale worth Rs. 300 crores.
3. Rs. 300 crores Offer for Sale aggregates the stake sale by the Promoters- Yellow Stone Trust and Mr. Ravi Goenka, MD of the Company.
4. The price Band of the IPO hovers around Rs. 129- Rs. 130. The Face value is Rs. 2 per equity share.
5. Laxmi Organics is listing on both BSE as well as NSE.
6. Lot Size of the IPO includes 115 shares in single lot and in multiple thereof up-to 13 lots.
7. The Objective of issue of IPO are:

i) Investment of Rs. 53.58 crores in Subsidiary Firm, Yellowstone Fine Chemicals Private Limited (YFCPL) to partly finance the capex to establish a new manufacturing facility.

ii) To invest Rs. 37.75 Cr. in YFCPL for financing working capital requirements.

iii) To finance total Rs. 81.87 Cr. the capex for expansion of SI Manufacturing facility.

iv) To finance Rs. 35.17 Cr. for meeting working capital requirements.

v) To purchase plant and machinery for infrastructure development at SI facility worth Rs. 12.24 Cr.

vi) To make prepayment or repayment of borrowings of Rs. 205.91 Cr. availed by the company and subsidiary, Viva Lifesciences Pvt. Ltd. (VLPL).

vii) To meet general corporate purposes.

• The IPO will also bring change to the shareholding pattern of the company. Promoters’ shareholding in the company will decrease from 89.51% (Pre-Issue) to 72.92% (Post-Issue).

2) Laxmi Organics Industries Limited (LOIL) – Company Overview:

• Laxmi Organics Industries Limited was incorporated in 1989 and it is one of the leading manufacturers of specialty chemicals – Acetyl Intermediates and Specialty Intermediates in India with a rich experience of 3 decades.
• Company currently is among the largest manufacturers of ethyl acetate in India with a market share of approximately 30% of the Indian ethyl acetate market , ethyl acetate is used in Paints, Coatings, Perfumes & Pharma.
• Company’s products find application in various high-growth industries like Pharmaceuticals, Agrochemicals, Dyes and Pigments, Printing and Packaging, Inks & Coatings, paints, flavours and fragrances, adhesives and other industrial applications.
• Company is having 2 key business segments i.e., Acetyl Intermediaries (AI) and Specialty Intermediates.
• In the Specialty Intermediates business segments of the company, it is the only manufacturer of Diketene Derivatives in India, with a market share of 55%.
• Laxmi Organics has significantly expanded its scale of operations and has global footprints in 30 countries across countries like China, Russia, Singapore, UAE, UK, USA and Netherland.
• Company is only having 2 Manufacturing Facilities at Mahad, Maharashtra for the manufacturing of AI and SI Products. Company is also having Research and Development Centre at Mumbai.
• The aggregate installed production capacity at the AI Manufacturing Facility was 161,320 MTPA, while the aggregate installed production capacity at the SI Manufacturing Facility was 78,045 MTPA.
• The proposed installation capacity is 82,525 MTPA, hence to cover up the gap of 4,480 MTPA, company eyes towards raising of money from the market.
• Current Capacity Utilization is 77.56% and company wants to grow the capacity utilization by 6%-7% in order to increase revenue and attract clients.

3) Laxmi Organics- Financial Performance:

i) Revenue from Operations:

• The Financial report of the company does not look much attractive.
• Revenue from Operation of the company has grown at a CAGR rate of 5.6% from Rs. 1,376 Cr. In FY18 to Rs. 1,534 Cr. In FY20 and Rs. 813 in first half of the FY21.

ii) Revenue Mix (FY20)- Application Wise:

• Pharma Sector contributes the highest 35.7% to the total revenue of the company.
• After Pharma, Distributors contributes the highest to the revenue mix of the company with 26.3%.

iii) Revenue Mix (FY20)- Geography-wise:

• Revenue of the company is majorly derived from domestic business. Of the total revenue of the company, 76% of the revenue is generated from business in India.
• Outside India, Europe contributes most to the revenue mix of India, by contributing 14% of the total revenue.

iv) Operating Profit Margin:

• Company has reported continuous downfall in its Operating Profit Margin between the FY18 to FY20.
• In the FY18, EBIDTA Margin were 11%, which decreased to 9.8% in FY19, further it went down to 7.4% in FY20.
• Company has witnessed improvements in its operating profit margin by reporting 10.5% growth in its margin in H1FY21.

v) PAT Margin:

• The case of PAT Margin is same as in the case of EBIDTA Margin.
• Company has witnessed decline in PAT Margin from 5.5% in FY18 to 4.6% in FY19 and was constant in FY20.
• Until FY20, the CAGR growth is -3.7%, but company has recorded Net Profit of Rs. 46 Cr. in H1FY21, which sets the path for upward direction of the PAT of the company and this will also improve the PAT margin of the company.

vi) ROE & ROCE:

• Despite average financials, company is able to put a good ROE and ROCE numbers on the board.
• ROE and ROCE has also faced a downward trend between the FY18 to FY20.
• ROE was plummeting down from 20% in FY18 to 12.8% in FY20. But improvement has been recorded in the FY21, as the ROE of the company rebounds to level of 19.3% in FY21 (Annualized Numbers).
• Likewise, ROCE has also declined from 26.6% in FY18 to 12.8% in FY20. On account of the effort by the company to raise capital, there is improvement in ROCE numbers on annualized basis which presents ROCE of the company as 20.3% for FY21.

4) Peer Comparison:

• Tough competition in between the peers
• SRF is the largest company among the mentioned peers with the highest market capitalization of Rs. 33,172 Cr. Market Cap. of Aarti Industries and Atul Ltd. stands at Rs. 22,251 Cr. & 20,073 Cr. respectively. Upon Listing, Laxmi Organics will be the Small Cap Company with M-Cap. of Rs. 3,428 Cr.
• If we address the Operating Profit Margin of peers, Navin Fluorine has the highest Operating Profit Margins of 28%, followed by  Fine Organics with 25.4% and Atul Ltd. has OPM of 23.9%. Among all the peers, Laxmi Organic has the Lowest Profit Margin of 7.9%, also this margin might improve this year.
• In terms of ROE also, Laxmi Organics lacks behinds its competitors. Navin Fluorine again has the highest ROE with 32.4%. Fine Organics also have its ROE above 30%. And here again, Laxmi Organics ranks the lowest in this parameter also among its peers, with ROE of 16.4%.
• While talking about Debt-to-Equity, Navin Fluorine and Atul Ltd. are the debt-free companies. And, Laxmi Organics currently have the D/E ratio of 0.15, and post-IPO, this may further reduce, as company has certain objective mentioned in its prospectus regarding repayment of borrowings.

5) Valuation:

• Laxmi Organic is currently trading at PE of 48.8x based on FY20 earnings. Since, the earnings have grown about 30% in current fiscal year, and therefore PE of the company can trade around 35x-40x.
• Considering the peers, Laxmi Organics is trading at premium valuation. And post-listing, it might be overvalued.

6) Strengths:

• Laxmi Organic is the leading manufacturer of Ethyl Acetate with significant market share of 30%. Company has been the largest exporter of ethyl acetate from India in the six months ended September 30, 2020 and Fiscals 2020, 2019 and 2018
• LOIL is the only Indian Manufacturer of Diketene Derivatives and one of the largest portfolios of Diketene Products. Company has 55% market share in India in this segment.
• Diversified customer base across high growth industries and long-standing relationships with marquee customers. Company maintains long-standing relationships with their customers and clients. Their clients name includes Alembic Pharmaceuticals Limited, Dr. Reddy’s Laboratories Limited, UPL ltd. etc.
• Strategically located manufacturing facilities, vertical integration and supply chain efficiencies. LOIL is having 2 manufacturing facilities for AI & SI located in Mahad, Maharashtra. Company has also 2 distilleries located in Maharashtra.
• In-house research and development capabilities and consistent track record of technology absorption. Company is having 2 R&D facilities located in Mumbai which works for development of new products.
• Company is having a wide global presence. LOIL serves clients from 30 countries including, UK, USA, China, UAE, Netherlands, Russia, etc.
• Company is having experience in handling complex chemistries which further helps in creation of entry barriers.

7) Risks:

• The Manufacturing units of the company is located in one geographical area only i.e., Mahad, Maharashtra. Any uncertain events or disruptions on these units can severely affect the production and hence business as well.
• Company wants to expand their new product line ‘Fluorospecialty’, and hence it is matter of concern for the company, that whether this product line will be successful or not.
• Company is having material exposure to foreign exchange related risks due to its presence over 30 countries.
• There are several criminal and civil cases against the company, its promoter and directors.
• Failure of R&D, might severely affect the existing as well as upcoming product line of the company.

Conclusion:

As per the valuation, Laxmi Organic seems to be overly priced. Looking at the financial performance, company seems to be struggling with revenue, operating profit and  margin, PAT & PAT Margin,etc, but the same represents the path of improvement in the current financial year. As of now, listing gains seems a possibility with grey market premium (GMP) around Rs.90-100. This translates to listing gains to the tune of 70-75%.