High valuation vs growth prospects: Should you bid for Anupam Rasayan IPO?

The euphoria in the primary market is showing no signs of abating as the eleventh initial public offer (IPO) for the calendar year 2021 hit the Street today. The issue of Anupam Rasayan, a speciality chemicals firm, will run between March 12 and March 16. The company plans to raise Rs 760 crore at the upper price band.

The IPO, which is entirely an issue of fresh shares, is priced in the range of Rs 553-555 per share and investors can bid for a minimum of 27 shares and in multiples thereof. The company plans to utilise the proceeds for repayment of Rs 564 crore debt and the remaining for general corporate purposes.

While most analysts have assigned a Subscribe rating to the IPO, they have also flagged valuations concerns.

"The IPO is valued at 80x and 69x earnings per share (EPS) for FY20 and annualized FY21, respectively, which look to be aggressively priced. However, considering capacity utilisation of 75 per cent as of 9MFY21 and likely interest cost savings from debt repayment from IPO proceeds, we believe its earnings can potentially register 35-40 per cent CAGR over FY20-23E. Despite factoring this, it trades at over 40x of FY23 earnings, which is expensive compared to its quality peers like SRF and PI Industries," said Vikas Jain, senior research analyst at Reliance Securities.

Its peers trade at an average P/E of 33x, as per Choice Broking.

Yet, analysts from Motilal Oswal Financial Services, Choice Broking and Anand Rathi believe that despite rich valuations, sectoral tailwinds make the company a long term-bet and have assigned a 'Subscribe' rating to the issue.

Financial Snapshot

India’s specialty chemicals industry is expected to grow at a CAGR of around 10-11 per cent over the next five years, due to rising demand from end-user industries, along with tight global supply on account of stringent environmental norms in China.

"Considering the rising fancy for the life care and specialty chemicals segment, linked with future performance trends, the company is expected to do well post listing going forward. Moreover, the company has a strong financial position and has been generating positive cash flow. We are positive on the long-term prospects of the company," said Shikher Jain, research analyst at Anand Rathi.

Over FY18-20, the company's revenue, Ebitda and PAT grew at a CAGR of 24 per cent, 35 per cent and 140 per cent while Ebitda margins expanded 397 bps to 25.5 per cent. Backward integration in FY15 helped Anupam Rasayan reduce its import dependence to 22 per cent by FY20, and improve its margins. In 9MFY21, despite Covid-19 impact, the revenue, Ebitda and PAT grew 45 per cent, 28 per cent and 12 per cent, respectively.

As per Astha Jain of Hem Securities, the company's focus on maximising utilisation of newly set Unit 5 and Unit 6 will be the revenue driver for the company going forward. She has recommended subscribing to the issue for short and long term purpose as the company is from an industry that has significant entry barriers and strong clientele with a high customer retention ratio and healthy Ebitda margins.

The company has strong and long-term relationships with various multinational corporations, including Syngenta Asia Pacific Pte., Sumitomo Chemical Company and UPL.

While analysts are impressed by the company's strong revenue and Ebitda performance, Vikas Jain believes financial metrics have not been inspiring as its working capital cycle has been abnormally high (over 7 months), which has impacted its cash flow. Less than 1x asset turnover ratio over the years and low operating cash flow yields raise apprehensions, he said.