Chemcon Speciality Chemicals Limited IPO (Chemcon IPO) Detail
Incorporated in 1988, Chemcon Speciality Chemicals Ltd is a manufacturer of specialized chemical products i.e. HMDS and CMIC. Its product portfolio includes oilfield chemicals (Calcium Bromide, Sodium Bromide, and Zinc Bromide), Pharma intermediates, Silanes, and chemicals contract manufacturing work. Chemcon Chemicals is a leading manufacturer of Pharmaceutical chemicals and generates maximum revenue from this particular segment. In 2018, it was the 8th largest manufacturer of HMDS and 2nd largest manufacturer of CMIC chemical worldwide.
Objects Of the Issue
Firm purposes to utilize the net proceeds from the IPO towards below objectives
• To meet capital expenditures for expansion of manufacturing facility.
• To meet business working capital requirements.
• To meet general corporate purposes.
Covid Impact- There was a limited impact of pandemic on the company. As the chemicals manufactured by chemcon find application in the pharmaceuticals industry, and Pharmaceutical Chemicals which were categorized as 'essential goods’. Therefore, the Manufacturing Facility was only temporarily shut during the pandemic from March 24, 2020 till March 31, 2020. They resumed manufacturing from April 1, 2020.
Positives
1) Experienced Senior Management - It has an experienced senior management.
2) High Entry Barriers -The specialty chemicals industry in which it operates has high entry barriers.
3) Strong Revenue and PAT Growth - The company has reported revenue from operations of Rs 262.05 crore with EBITDA of Rs 70.26 crore and profit Rs 48.85 crore in FY20. In FY18-FY20, company's revenue from operations grew at a CAGR of 28.93 percent, EBITDA 24.82 percent and profit after tax at a CAGR of 36.08 percent. Thus Company has delivered consistent financial performance with a strong financial position.
4) Valuations - At the upper end of the price band, Company demands PE multiple of 22.1x on FY20 basis. None of the listed chemical companies has the same business as Chemcon. Its specialty chemical peers such as Neogen Chemicals, Paushak, Atul and Aarti Industries are currently trading at P/E multiples of 57.0x, 37.6x, 29.6x and 35.6x respectively on FY20 EPS. Return ratios and margins are better than most of its peers. Analysts said that the issue is demanding an inexpensive valuation of 25.5 times FY20 earnings per share and that the company could gain from a shift in demand from China.
5) Anchor Investment - Speciality chemicals manufacturer Chemcon Speciality Chemicals has raised Rs 95.4 crore from 13 anchor investors on September 18 ahead of its public issue opening next week.
6) COMPARISION WITH LISTED PEERS: As per offer documents, CSCL has shown Aarti Ind., Vinati Organics, Sudarshan Chemicals, Atul Ltd., Paushak Ltd., Fine Organics and Neogen Chemicals as its listed peers. Currently, they are trading at a P/Es of around 39.75, 42.48, 27.94, 31.26, 39.14, 55.64 and 55.59 (as on September 18, 2020 closing). However, they are strictly not comparable on an apple to apple basis.
Negatives
1) Regulatory - The company operates in a highly evolving market and any inability to respond to such changing conditions couldadversely affect our business and results of operations.
2) Legal- Criminal proceeding against a promoter.
3) Foreign Currency- Foreign exchange risks with Large Part of Revenue Generated Abroad.
4) Customer Concentration – Top 5 clients account for about 59.95 per cent of the company's revenues.
Conclusion
On an upper price band of Rs 340, with EPS at Rs 15.37 for FY 20, the stock is available at a P/E ratio of 22.12x, (lower than the industry average) which makes the IPO valuation fairly attractive. we recommend to subscribe the IPO for listing as well as long term gains.
In the grey market, the shares of the company were trading with a premium of Rs 275 per share, that is, 81 per cent more than the price band set for the IPO.