Chemcon IPO note (Subscribe)

Review By Rudra Shares & Stock Brokers Ltd on Sep 20, 2020

VALUATION

The various product offerings enclosing Pharma chemicals generating more than 60% revenues attract the share. Also, as per reports, the company is the sole producer of HMDC & CMIC products which has huge demand not only in India, but also has an opportunity for growth in exports. Thus, we believe it would significantly add to revenue growth in coming years.

Additionally, company has maintained long standing relationships with its customers. Aurobindo pharma- is amongst the key customer from the bucket list from years, marks  a good growth story ahead.

The company's expansion plans to set up two new plants and one laboratory with a total volumetric reactor capacity of 251.00KL, at existing Manufacturing Facility Manjusar, Vadodara, would significantly increase the capacity by 60%,  total volumetric reactor at 625.85 KL. Also, would enable to benefit from economies of scale in next few years.

Fundamentally too, Company looks sound with impressive ROCE & ROE at 37.92% & 34.23% for FY20, favorable debt-equity ratio and stable PAT & EBITDA margins .

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.

 

THE OFFER

      Issue Open : 21st  September 2020 to 23rd  September 2020

  »»  Issue Type:  Book Built Issue IPO

    »»  Total Issue Size:  Rs 318 cr

            Ü Fresh issue:  4,852,940 Equity Shares @ 10 aggregating up to Rs165 cr 

            Ü  Offer for Sale:  4,500,000 Equity Shares @ 10 aggregating up to Rs 153 cr 

   »»  Face Value:  Rs 10Per Equity Share 

   »»  Issue Price:  Rs 338  - Rs 340 Per Equity Share 

   »»  Market Lot:  44 Shares 

   »»  Minimum Order Quantity:  44 Shares 

   »»  Listing At:   NSE & BSE

 

CAPITAL STRUCTURE

The  share capital of Company, is set forth below:-

                                                                                                                   (Amount in Rs except share data)

Authorized Share Capital :-

   50,000,000 Equity Shares @10 Aggregate value Rs 500,000,000

Issued, subscribed and paid up capital before the Offer :-

   31,777,760 Equity Shares @10 Aggregate value Rs 317,777,600

Fresh issue: Equity Shares @ 10 aggregating up to Rs 165 cr

Offer for sale: Equity Shares @10 aggregating up to Rs153

 

OBJECT OF THE OFFER

The objects of the Offer are:

ØCapital expenditure towards expansion of the Manufacturing Facility(Rs 41.033cr)

ØTo meet working capital requirements(Rs 90.00cr)

ØGeneral corporate purposes.  

Particulars

Estimated Utilisation of Net Proceeds (`in cr)

FY21

FY22

Capital expenditure towards expansion of the Manufacturing Facility

41.033

-

To meet working capital requirements 

40.00

50.00

General corporate purposes

-

-

                                                

Forward Comments

The net proceeds would be utilized for expanding the manufacturing operations & production capacity. Thus, for this,  it would set up two new plants and one laboratory with a total volumetric reactor capacity of 251.00KL, at existing Manufacturing Facility at Manjusar, Vadodara. The current volumetric capacity (as on July,20) at the Manufacturing Facility is 374.85 KL. With the completion of such expansion, total volumetric reactor capacity to 625.85 KL which would enable to significantly benefit from economies of scale.

These additional plants shall be utilised for the manufacturing of chemicals which are principally used pharmaceutical Industry.

Further, Company has recently acquired approximately 22,000 square metres of land next to the Manufacturing Facility, to enable future expansion of the Manufacturing Facility. Together with the existing land which is approx. 29,000 square metres, now the total land after this acquisition is approximately 51,000 square metres.

 

New products Launches- CBC & 2,5DHT

Has commenced the manufacturing of 4 CBC (widely used in the Pharmaceutical & Agrochemical industry) and executed first sale of 4 CBC in July 2020.

The 2,5DHT (used in the Pharmaceutical industry) is in process of commencing. Due to the COVID-19 pandemic and the related travel restrictions, the approval for 2,5DHT remained pending.

Approval from Government Authorities

Secured environment clearance for manufacturing of 44 products (including 9 current products) & increasing the quantity of products from 2,511MT per month to 10,611 MT per month from the Government of Gujarat.

 

Commissioning of new plants-  P7& P2

] Plant P7 commissioned on March 16, 2020 with a reactor capacity of 125.20KL & an installed capacity of 1800MT per annum. The plant is a multipurpose used for manufacturing of Pharmaceutical chemicals, is currently used for manufacture of HMDS. Besides, can also be used for  4CBC, 2,5DHT & other products.

] Plant P2 commissioned on July 6, 2020 with a reactor capacity of 13 KL. This plant has a capacity of manufacturing 600MT per annum of High-purity HMDS used in semiconductor & rubber/silicone industries. Can also be used for manufacture of normal HMDS, in such case can manufacture upto 1800MT per annum.

 

COMPANY OVERVIEW

CSCL is a manufacturer of specialized such as HMDS and CMIC which are predominantly used in the pharmaceuticals industry and inorganic bromides, namely Calcium Bromide, Zinc Bromide and Sodium Bromide, which are predominantly used as completion fluids in the oilfields industry. Company supplies its products to domestic as well as customers outside India including United States of America, Italy, South Korea, Germany, People's Republic of China, Japan, United Arab Emirates, Serbia, Russia, Spain, Thailand and Malaysia.

Key customers:

  Pharmaceutical Chemicals- Hetero Labs Limited, Laurus Labs Limited, Aurobindo Pharma Limited, Sanjay Chemicals (India) Private Limited, Lantech Pharmaceuticals Limited, Ind -Swift Laboratories Limited, Vivin Drugs & Pharmaceuticals Limited and Macleods Pharmaceuticals Limited.

 Oilwell Completion Chemicals- Shree Radha Overseas, Water Systems Specialty Chemical DMCC and CC Gran Limited Liability Company.

 

Thus, the Pharmaceuticals Chemicals and the Oilwell Completion Chemicals are targeted to and largely marketed and supplied to industries operating in the pharmaceuticals and the oilfield industry respectively.

  Well equipped manufacturing facility

  Chemcon's manufacturing facility is located in Manjusar near Vadodara in Gujarat. Having seven operational plants of which-

  ü 2 plants are for  manufacturing of HMDS and ancillary products (including one plant for the manufacturing of hi-purity HMDS),

   ü 1 multipurpose plant, currently being used for manufacturing of HMDS and other pharmaceutical chemicals,

      ü 2 plants for manufacturing of CMIC and

   ü 2 plants for manufacturing of Oilwell Completion Chemicals.

  Along with these manufacturing facilities, is well equipped with 3 warehouses.

  In addition has in-house laboratory and 5 lease warehouses.

 

Details of Installed capacity  (as on July 31,20)

 (a) HMDS- 4,200 MT per annum

        HMDS (hi-purity)-  600 MT per annum;

(b) CMIC- 1,800 MT per annum and;

 (c) Oilwell Completion Chemicals- 14,400 MT per annum,

The total volumetric reactor capacity is 374.85 KL within the Manufacturing Facility.

 

As per report (Frost & Sullivan Report),

In terms of production, it is the sole manufacturer of HMDS in India and were the third largest manufacturer of HMDS worldwide in the calendar year 2019 .

In terms of Production and capacity, the largest manufacturer of CMIC in India and the second largest manufacturer of CMIC worldwide in calendar year 2019.

Further, it is the only manufacturer of Zinc Bromide and the largest manufacturer of Calcium Bromide in India, in terms of production in calendar year 2019  

 

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.

 

FINANCIAL HIGHLIGHTS

Company generated revenue at Rs 262.052cr during FY20, growing at a CAGR of 28.93% between FY2018 & FY20.

  EBITDA grew remarkably well from Rs 45.10cr in FY18 to Rs 70.26cr in FY20, growing at a CAGR of 24.82% in the same period.

  Profit for the company doubled to Rs 48.85 cr in FY 20 from Rs 26.38cr in FY18, growing at a CAGR of 36.08%.

  Enjoys healthy PAT & EBITDA margins at 18.64% & 26.81%.

 Moreover, EPS has shoot up to Rs 15.37 from Rs 8.30 in FY18. The ratios, including the ROCE & ROE is sound at above 30%, is 37.92% & 34.23% for FY20 respectively.

 

Revenue contribution

Pharma chemicals contributes the highest percentage to the revenue, greater than 60%. The details are stated as under:

  In FY20, Pharmaceutical Chemicals collectively contributed Rs 167.05 cr, amounting to 63.75% of total revenue from operations.

  MDS (including ancillary products) contributed Rs 131.24 cr amounting to 50.08% of total revenue from operations,  while CMIC contributed Rs 33.86 cr  amounting to 12.92% of  total revenue from operations.

  Further, in FY20 Oilwell Completion Chemicals collectively contributed   Rs 87.72 cr, amounting to 33.47%, of total revenue from operations.

 

Particulars

 Revenues(FY20)    `in cr

% of revenue

Pharmaceutical Chemicals

167.05

63.75%

MDS

131.24

50.08%

CMIC

33.86

12.92%

Oilwell Completion Chemicals

87.72

33.47%

 

Revenue-Top5 customers

Revenues

FY18

FY19

FY20

     Percentage of Revenue from Operations

Top five customers

60.01%

45.94%

59.35%

Oilwell Completion Chemicals (Top five)

97.23%

90.78%

95.39%

Pharmaceutical Chemicals (Top Five)

64.68%

53.68%

57.22%

 

% of Revenue from exports

In FY2020, 39.78% of revenue from operations was from exports (including Deemed Exports). This have grown at a CAGR of 17.57% between FY2018 and 20. In FY20, supplied the Oilwell Completion Chemicals largely to customers in India, the Middle East, Serbia and Russia. Now, aiming to expand Oilwell sales in existing and new geographies including Nigeria, Malaysia, China and Ghana.

 

Growth Driver

India is currently a net importer of HMDS, with about 40% of India's domestic demand in calendar year 2019 being catered by imports majorly from China and Germany. The demand growth in India is expected  to be 10.6% CAGR between calendar year 2019 and calendar year 2023 (source: Frost & Sullivan Report).

Having said that, the company being the only manufacturer of HMDS in India, is well positioned to capitalise on the potential growth of the HMDS market having immense opportunity. Moreover, issues of china with other countries open up huge potential to tap their customer base. This could not only help chemcon to improve exports but will improve their revenue growth rate.

Similar is the case with CMIC product. There too, it would offer huge opportunity for company to improve their Revenues & exports.

 

STRATEGIES AHEAD

?Expansion of total installed production capacity

?Augmenting growth in the current geographic markets and expanding into new geographic markets

? Exploring newer applications of existing products as well as focusing on new products that are in synergy with  current operations

? Continue to strive for cost efficiency

 

STRENGTHS

?Leading manufacturer globally of the Pharmaceutical Chemicals and a leading manufacturer of the Oilwell Completion Chemicals in India

?Diversified customer base coupled with long standing relationships;

?Manufacturing facility with dedicated plants for each  products;

? High entry barriers in the specialty chemicals industry

? Experienced Senior management

 

RISK FACTORS

ØThe outbreak of Coronavirus, could have a potential impact on the  business

Ø The commercial success of  Oilwell Completion Chemicals is dependent on the level of oil and gas exploration, development and production activities

Ø Fluctuations in foreign currency exchange rates.

Ø Political, social, legal and economic changes

Ø Inability to comply with laws and regulations.

Ø Increase in Raw material prices

 


Conclusion / Investment Strategy

The various product offerings enclosing Pharma chemicals generating more than 60% revenues attract the share. Also, as per reports, the company is the sole producer of HMDC & CMIC products which has huge demand not only in India, but also has an opportunity for growth in exports. Thus, we believe it would significantly add to revenue growth in coming years. Additionally, company has maintained long standing relationships with its customers. Aurobindo pharma- is amongst the key customer from the bucket list from years, marks a good growth story ahead. The company's expansion plans to set up two new plants and one laboratory with a total volumetric reactor capacity of 251.00KL, at existing Manufacturing Facility Manjusar, Vadodara, would significantly increase the capacity by 60%, total volumetric reactor at 625.85 KL. Also, would enable to benefit from economies of scale in next few years. Fundamentally too, Company looks sound with impressive ROCE & ROE at 37.92% & 34.23% for FY20, favorable debt-equity ratio and stable PAT & EBITDA margins . 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.

Reviewer recommends Subscribing to the issue.

Review By Rudra Shares & Stock Brokers Ltd on Sep 20, 2020

Review Author

Rudra Shares & Stock Brokers Ltd.

Rudra Shares & Stock Brokers Ltd. is Kanpur based brokerage houses offering services to Retail and HNI customers. Rudra Shares offer a range of financial services which includes institutional and retail brokerage of Equity, Currency, Commodities, Derivatives, Online Trading, Depository Services, Fixed Deposits, IPOs and Mutual Funds Distribution, Wealth Advisory and Research.

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