Rossari Biotech Ltd IPO | Should I Subscribe?

Rossari Biotech Ltd IPO Review – 5 Point Analysis

Introduction

Should I Subscribe to the Rossari Biotech Ltd IPO? Lets analyse IPO on various fronts like the details of IPO, its listing, company overview, analysis of sector in which the company operates, financials and valuation of the company and finally whether or not an investor should subscribe for the IPO.

Rossari Biotech Ltd IPO | Should I Subscribe?

IPO details

• IPO is open from 13^th July’20 to 15^th July’20 and company is planning to raise around INR 500 crore from the equity markets.
• Many institutional investors like ICICI, Mirrae asset, Life insurance companies, HDFC, etc have invested in pre-IPO investment. The overall investment by institutional investors in pre – IPO allotment is INR 100 crores (INR 425 per share).
• Confidence shown by institutional investors is encouraging, which is a positive sign.
• Price band of the company hovers around INR 423- INR 425 crore per equity share which would lead to a market capitalisation of INR 2,200 crore.
• This indicates that it will be a small cap company and mostly suitable for aggressive investors.
• Company has a lot size of 35 shares (in one lot) and a retail investor can apply maximum for 13 lots (455 shares).
• To summarise the details of IPO :

Pre IPO shareholding of promoters is around 95.1% which would change to 73% post IPO. Hence, company is abiding by the rule to have the promoter holding below 75% within 3 years of listing on stock exchange.

• This IPO would be a mix between fresh issue of capital and offer for sale. Here company’s promoters (Sunil Chari and Edward Menezes)  will be selling 10.5 crore equity shares held by them and fresh issue of capital of INR 50 crore.
• The main objective of IPO is debt restructuring and to fund working capital requirements.

Company Overview – What does Rossari Biotech do?

• Rossari Biotech mainly operates in 3 segments in specialty chemicals sectors – Textile specialty chemicals, Home, Personal care & Performance Chemicals and Animal Health & Nutrition Products. It is market leader in textile specialty chemicals.
• Geographic Presence – Company has a wide geographic presence in 17 countries and mainly exports to emerging economies like Vietnam, Bangladesh, Mauritius, etc.
• Product Portfolio – ~2000 products across various categories.
• Strong R&D facilities – Company has two R&D facilities located at Silvassa and Mumbai. Company is also setting up a manufacturing facility at Dahej in Gujarat which will have a cost as well as logistic advantage being closer to the Dahej port.
• Major clients – HUL is a major client of company in the Home and Personal care category.
• Let us take a look at the company’s revenue mix in FY20 and FY18 and change in its contribution.

• Over the 2 years, Home & Personal care segment’s contribution has increased, whereas that of textile specialty chemicals has decreased, mainly as the textile industry sector is facing many headwinds.
• Animal Healthcare & nutrition contribution has remained same over the 2 years.
• During the current uncertain times, increasing revenue from home & personal care segment provides a good moat to the business and it is expected to record good growth in upcoming time.

Sector Analysis

• Let us take a look at the sector in which the company operates i.e. Specialty chemicals sector.
• Before 4-5 years, China was a market leader in specialty chemicals sector. However the implementation of blue sky policy (to remove the manufacturing facilities which produced harmful chemicals impacting the air quality) by China hampered the Chinese specialty chemicals sector.
• This move by China, greatly favoured the Indian specialty companies in attracting the clients lost by Chinese companies.
• However, investors should take a note of an inherent risk of Indian government also imposing any regulatory restrictions on manufacturing facilities of specialty chemical companies to control air pollution. Thus, this sector faces a risk from ESG perspective.
• Apart from this major risk, sector is well placed to drive the growth momentum.
• Rossari Biotech peers – In the listed space, companies like Aarti Industries, Vinati Organics, Galaxy surfactants, etc are the peers of Rossari Biotech Limited.
• If we look at the segment wise competitors, most of the competitors in Home & Personal care space are MNCs like Merck, BASF, etc, while textile specialty chemicals has mostly international companies.

Financials of Rossari Biotech

Company has posted robust results over the last 2 years (FY18- FY20) as seen below, which is a very positive sign.

• Company’s ROCE for FY20 is reported around 25% which is quite healthy, however looking at the movement of ROCE over the last 2 years, it has almost registered a decline of 50% from 51% in FY18 to 25% in FY20. This declining trend in ROCE can be a matter of concern for retail investors.
• However, as of now considering the current ROCE and other parameters of the company (Revenue, EBITDA and Net Profit CAGR), company looks in a good shape financially.

Valuation Analysis

• Price to earnings ratio of the company at this valuation comes around ~31-33.
• Comparing the current valuation of company w.r.t its listed peers, it appears that the it is commanding premium valuations. Even in grey markets, company is trading at 25-30% premium valuations.

• Looking at the premium valuations, we can say that short term retail investors can get listing gains
• However, given the current uncertain times, like we witnessed in case of SBI cards IPO, company being sound financially , got listed at discount mainly as the news of COVID-19 pandemic spreading rapidly lead to severe crash in stock markets.
• This can also be the case for Rossari Biotech if any negative news comes around the time of its listing (23^rd July’20).

Should I subscribe to the IPO?

• Although the company is placed well in terms of financials and valuations, but it does not stand distinguished among its peers, which have similar product portfolios and are trading at lower valuations.
• Points of concern –
  • Decline in revenue contribution from textile specialty chemicals segment (over last 2 years) in which company is a market leader.
  • Impact of changing consumer behaviour due to the pandemic, which might impact discretionary spending on home & personal care segment.
  • Risk of government imposing regulatory restriction can hamper the performance of overall sector.
• We feel if the new investment does not provide much incremental returns on your overall portfolio, it would not be advisable to subscribe the IPO just for diversifying the investments as the risk -reward ratios does not seem favourable.
• However, investors should take into consideration their risk and return goals and take a decision accordingly with the help of their financial advisors.