Fineotex Chemical Ltd IPO Review (Avoid)

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Review By MLR Securities Private Ltd on Feb 25, 2011

• Issue Size: Rs 25-30 Cr;
• Price Band: Rs 60-72;
• Issue Date: Feb 23-Feb 25;
• Grey Market Premium: Rs 3-3.5;
• Market Cap - Rs 67-81 Cr,
• BRLM - Indbank Merchant Banking Services ltd.

Issue objects

1. To set up a manufacturing facility - Rs 7.4 Cr
2. To set up sales office in Mumbai - Rs 1.8 Cr
3. To meet working capital requirements - Rs 8 Cr

Fineotex Chemicals is engaged in manufacturing of speciality chemicals and enzymes catering to Textile & Garment, Construction, Leather, Water Treatment, Paper, Adhesives and Agrochemical Industries. The company has manufacturing facility in Navi Mumbai with a capacity of 5,000 MTPA. FCL proposes to set up a manufacturing facility in Khopoli, Maharashtra which will increase the total capacity to 18,250 MTPA by FY12.

FCL's major customers include Pidilite Industries Limited, Croda Chemicals India (P) Ltd, Rashtriya Chemicals & Fertilizers Ltd, The Bombay Dyeing & Mfg. Co. Limited., Raymond Group, Grasim Industries Limited, Clariant Chemicals India Limited, JCT Limited etc.

The company's topline declined at a CAGR of 16.31% in three years from FY08 to FY10 to Rs 22 Cr despite the revenues from the sale of manufactured speciality chemicals rising at a CAGR of 12.42%. As the company gradually reduced its trading activities, which formed 46.7% of sales in FY08 to focus on sale of manufactured speciality chemicals. There were no trading revenues in FY10. In 1HFY11 the company has posted good set of numbers with the total income of Rs 13.5 Cr and a PAT of 2.1 Cr.

The company's EBITDA margin improved to 27% in FY10 from 20% in FY09 as the company had discontinued trading activities. With the improvement in EBITDA and a decline in interest cost the PAT margin increased to 17% in FY10 from 11% in FY09. The company is almost debt free as on FY10.The average collection period increased to 91 days as on FY10 on decline in sales as FCL shifted its focus towards sale of manufactured goods only and in FY10 there was no sale of traded goods.

Revenue Concentration

Top five customers contribute around 56% of the total revenues. The loss of a significant customer or customers would have an adverse impact on the company's revenues.

Valuations

The company's market cap is coming to around Rs 67-81 Cr on a price band of Rs 60-72. The price earnings multiple is coming to 15.7-18.8 on an annualized EPS of FY11 which is very expensive considering the company is a very small player in the speciality chemicals industry. The large players like BASF India, Clariant Chemicals are trading at 10.4 and 13.4 times their annualized EPS of FY11 respectively.

Promoters

Mr Surendra Kumar Tibrewala is the promoter of the company has more than three decades of experience in speciality chemicals and enzymes industry for various industries like Textile & Garments, Construction, Paper and Pulp Industry, Adhesives etc.

Mr. Sanjay S. Tibrewala, son of Mr Surendra Kumar Tibrewala is the Whole-time director of the Company. He is a Post Graduate, having specialized in Textile Processing and Chemicals from Sasmira University, Mumbai.

Conclusion / Investment Strategy

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