Chemcon IPO: How momentum in the pharma sector is positive for the company

Chemcon Speciality is the only manufacturer of HMDS in India & 3rd largest worldwide. Besides, it is the largest player of CMIC in India. Both these chemicals are predominantly used in pharma sector

Pharmaceutical and oilfield chemical manufacturer Chemcon Speciality Chemicals’ initial public offering (IPO) is set to open today. With a price band of Rs 338-Rs 340, the company plans to raise up to Rs 318 crore during its three-day public offer which closes on Wednesday, September 23.

On September 18, the company raised Rs 95.4 crore through allotment of 2.806 million shares to anchor investors at Rs 340 per share, according to an exchange notification.

IDFC Emerging Business Fund, IDFC Dynamic Equity Fund, ICICI Prudential Child Care Plan Gift Plan, IIFL Special Opportunities Fund Series 7, HSBC Global Investment Funds, Mirae Asset funds, Canara HSBC Oriental Bank of Commerce Life Insurance Company, Ashmore India Opportunities Fund, Kuber India Fund, Tata Multi Asset Opportunities Fund, Reliance Equity Opportunities AIF Scheme 1, and Abakkus Emerging Opportunities Fund-1 were among the anchor investors.

The book-building IPO consists of fresh issue of up to Rs 165 crore (4.85 million equity shares) and an offer for sale (OFS) of up to Rs 153 crore (4.5 million equity shares). Promoters Kamalkumar Rajendra Aggarwal and Naresh Vijaykumar Goyal will offload 2.25 million equity shares each under the OFS which would result in promoter’s stake reducing from 100 per cent pre-IPO to 74.5 per cent post-IPO. Bids can be made for a minimum 44 equity shares and in multiples of 44 shares thereafter.

The offer is 50 per cent available for qualified institutional buyers (QIBs), 15 per cent from non-institutional investors (NIIs), and 35 per cent for retail investors.

According to the company’s red herring prospectus, filed with market regulator Sebi, the company aims to utilise fresh issue proceeds for capital expenditure towards the expansion of manufacturing facility, working capital requirements, and general corporate purposes.

 What’s working for the company?

Established in 1988, CSCL is the only manufacturer of Hexamethyldisilazane (HMDS) in India and 3rd largest in the world. Besides, it is the largest player of Chloromethyl Isopropyl Carbonate (CMIC) in the country and 2nd largest worldwide. Both these chemicals are predominantly used in the pharmaceuticals industry.

According to the company’s prospectus, HMDS and CMIC constituted 43.8 per cent and 13 per cent of the total revenue from the pharmaceutical chemicals segment (which contributed 57.4 per cent towards total revenue from operations) in FY20.

“Globally, the production of HMDS has increased by 3.5 per cent CAGR over 2014-19 as compared to 10.7 per cent growth registered by Chemcon. With emergence of Covid-19 pandemic, the growth is likely to be higher in the near term as globally antibiotics in combination with other drugs are used on a large scale to cure Covid-19 patient for bacterial infections,” noted analysts at Choice Broking.

As regards CMIC, India is the largest consumer of the chemical in the world and accounts for 65 per cent of the global demand. “India is also a net importer of CMIC, with about 62 per cent of the domestic demand in 2019 being catered to by imports from China. As domestic CMIC is anticipated to grow in excess of 10 per cent in the mid-term, Chemcon has immense growth opportunity when coupled with the import substitution drive of the government,” they said with a “subscribe with caution” rating.

Analysts at Geojit Financial Services, meanwhile, derive comfort from the company’s loyal clientele and reach in the overseas market. The brokerage has a “subscribe” rating for the IPO.

“About 68.6 per cent of the total revenue from operations in FY20 was contributed by customers who have been consistently purchasing products over the last five years. Top seven customers for FY20 have been customers of CSCL for over four years which shows its strong customer base and long standing relationships,” they said in an IPO note.

Some of Chemcon’s notable customers in the pharma space include Hetero Labs, Laurus Labs, and Aurobindo Pharma, while those in Oilwell Completion Chemicals include Shree Radha Overseas, Water Systems Specialty Chemical DMCC and CC Gran Limited Liability Company.

CSCL exports to countries such as USA, Italy, South Korea, Germany, China, Japan, UAE, Serbia, Russia, Spain, Thailand and Malaysia which contributed around 40 per cent of revenue from operations from exports (including deemed exports) in FY20.

In terms of valuations, analysts at Angel Broking value the company’s P/E ratio at 22.1 which is much lower than Neogen Chemicals (57), Paushak (37.6), Aarti Industries (35.6), Vinati Organics (41.2), and Fine Organics (53.3).

“None of the listed chemical companies has the same business as Chemcon. Besides, the company’s return ratios and margins are better than most of its peers. We believe it is clearly undervalued compared to its peers. As we are positive on the future outlook for the industry as well as the company, we would recommend to ‘Subscribe’ issue for long term as well as for listing gains,” the brokerage said in an IPO note.

Motilal Oswal Financial Services values the company at 25.5x FY20 P/E (fully diluted) at the higher end of the price band, which it says is reasonable compared to peers. “Further considering the bright prospects for Chemical companies due to shift of supply chain away from China, we believe Chemcon would be well placed to capture this with its planned capex. Hence, investors can Subscribe to the IPO,” it said in a report.

"Despite growth being impacted in FY20, Chemcon financial performance has been encouraging with Revenue and PAT CAGR of 28.9 per cent and 36.1 per centover FY18-20. This has been led by positive industry growth trends and company’s leadership position in its products, strong and long standing relationship with its clients. Additionally, the company has low debt levels (0.31x) and strong ratios. We believe the growth momentum can continue going forward led by capacity expansion, penetrating and widening geographical reach, and continued focus on cost efficiency. Further, high entry barriers in this industry limits the competitive intensity for the company. On the valuation front, the company is valued at PE of 22x FY20 EPS. We have a positive view on the company and one can look to invest for long term," said a note by Religare Broking.

Key concerns

1) Chemcon derived 59 per cent/72per cent of its revenue in FY20 from its top 5/top 10 clients. Thus loss of any one or more clients can adversely impact its financials  

2) Chemcon has a limited product portfolio and the business may be adversely affected if any of the products do not continue to perform as expected or if competing products gain wider market acceptance.  

3) The reduced demand for oil and gas in Fiscal 2021 has resulted in a reduced demand for the Oilwell completion chemicals. Company is yet to resume manufacturing new batches of oilwell completion chemicals since the country-wide lockdown was lifted.

4) Company’s profitability largely depends upon the global prices of its products. Any significant fall in global prices may have a material adverse effect on the company’s business, results of operations and financial condition.  

5) Naresh Vijaykumar Goyal, a member of the Promoter Group, has filed an appeal in relation to a criminal proceeding filed against him, which if determined adversely may have a negative impact.  

6) Chemcon has contingent liabilities and capital commitments which has not been provided for in its balance sheet.