Chemplast Sanmar IPO: Should you bet on a company with negative net worth?

Chemplast Sanmar IPO: Sustainability of financial performance and strong cash flow would be the key catalyst for valuation re-rating, say analysts

Chemplast Sanmar IPO: After Chemcon Speciality and Heranba Industries, another chemical maker – Chemplast Sanmar – is eyeing a second stint on the stock exchanges given the frenzy in the public offer market. The Southern India-based chemical manufacturing company has launched its initial public offer (IPO) on Tuesday with an aim to raise Rs 3,850 crore but analysts are not gung-ho about the company’s offer.
 

Earlier, CSL was a listed entity on the bourses until 2012, but was delisted in June that year on facing financial headwinds. Given this, Vikas Jain, research analyst at Reliance Securities, opines that a history of delisting in 2012 with market capitalization of mere Rs 200 crore after deterioration in financial performance led by volatile petrochemical prices and delay in projects commissioning does not augur well for Chemplast.

Going forward, sustainability of financial performance and strong cash flow would be the key catalyst for valuation re-rating, going forward," he says.

Near-term financial concerns weigh
 

According to Jyoti Roy - DVP- Equity Strategist at Angel Broking, concerns over the company’s high debt and negative net worth weigh on the company's prospects even as the industry's outlook remains robust.
 

CSL fully acquired Chemplast Cuddalore Vinyls Ltd (CCVL), the second largest manufacturer of suspension PVC resin in India and the largest manufacturer in South India region on the basis of installed production capacity, in the previous financial year (FY21) to improve its product offering. However, the acquisition resulted in sharp increase in its debt.
 

At the end of financial year 2021 (FY21), CSL’s gross debt stood at Rs 2,110 crore, up from Rs 1,290 crore at the end of FY20, and Rs 250 crore at the end of FY19. Consequently, the company’s net worth turned negative (-Rs 3.5 billion), in FY21.
 

Nonetheless, its Ebitda (earnings before interest, tax, depreciation, and amortization) margin has been strong in the range of 25-26 per cent and cash flow generation has been healthy over the years, mainly led by strong margin and low working capital cycle. 
 

CSL generated cumulative operating cash flow (OCF) and free cash flow (FCF) to the tune of Rs 1,500 crore and Rs 1,300 crore, respectively over FY19-FY21. Total revenue increased substantially by 201 per cent for FY21 to Rs 3,815 crore from Rs 1,265 crore in FY20 pursuant to the acquisition.
 

On related ground, analysts at KRChoksey believe that the 100 per cent acquisition of CCVL, which is held by CSL, is pledged in favour of HDFC Limited, Besides, there is a huge reduction in promoters’ holdings from 98.8 per cent up to 54 per cent post IPO may affect CSL's near-term performance.

The brokerage, however, suggests subscribing to the issue for listings gains only as at the upper price band of Rs 530-541 and EPS of Rs 30.6 for FY21, the P/E multiple works out to be 17.6x, which is at a significant discount compared to the industry average of ~31x.
 

Chemplast Sanmar Ltd (CSL) is a part of the Sanmar Holdings Ltd, one of the oldest and most prominent corporate groups in the South India region. The company is a specialty chemicals manufacturer in India with a focus on specialty paste PVC resin and custom manufacturing of starting materials and intermediates for pharmaceutical, agro-chemical and fine chemicals sectors.
 

Further, it is one of India’s leading manufacturers of specialty paste PVC resin based on installed production capacity as of December 31, 2020. It is also the third-largest manufacturer of caustic soda and the largest manufacturer of hydrogen peroxide in the South India region and is one of the oldest manufacturers in the chloromethane market in India.
 

According to an assessment by Religare Broking, the demand for specialty paste PVC resin is expected to grow at a CAGR of 6-8 per cent between FY22-25 driven by government initiatives, lack of substitutes and rising demand from the leather footwear market. 
 

“We believe high barriers to entry and limited competition are expected to benefit existing manufacturers of specialty paste PVC resin in India. In addition, the demand for custom manufacturing, caustic soda and suspension PVC resin is expected to grow at a CAGR of 12 per cent, 4-5 per cent and 7-8 per cent between FY21-25, respectively,” said Nirvi Ashar, analyst at the brokerage.
 

Given this, while she believes CSL is well-positioned to benefit from the industry growth trends given its diversified product portfolio, its joint ventures and associate companies, which are posting losses from the last three years, remains a concern, she says.
 

Chemplast Sanmar’s IPO will remain open between August 10 and 12. The IPO comprises a fresh issue of Rs 1,300 crore by the company, and an offer for sale of Rs 2,463.4 crore by promoters, Sanmar Holdings and Sanmar Engineering Services.

The net proceeds from the fresh issue will be utilised for early redemption of non-convertible debentures (Rs 1,238.25 crore), besides general corporate purposes.

Source: Brokerage reports