Rossari Biotech IPO: A diversified portfolio, expansion are key triggers

Investor demand for specialty chemicals maker Rossari Biotech has been strong resulting in listing day gains of 75 per cent and a 143 per cent rise till date. A diversified product portfolio, emphasis on research and development, and expansion are the key triggers.
 

One segment that has helped this business-to-business supplier is home, personal and performance chemicals (HPPC), which accounted for 47 per cent of FY20 revenues and has been the main contributor of top line and margin expansion over the last few years.
 

Aided by a 95 per cent compound annual growth rate of HPPC during FY17-20, the company reported a revenue and operating profit growth of 32 per cent and 63 per cent, respectively. With the share of HPPC increasing from 15 per cent in FY17 to 47 per cent in FY20, overall profitability also increased as the business commands higher gross margins. Operating profit margin increased by 820 basis points to 17.5 per cent.

 

Analysts expect the HPPC share to improve to over 60 per cent, and it is expected to post 10 per cent-plus growth in the next two years. What will help Rossari Biotech is its diversification into sub-segments like personal care, breweries, dairy, construction and water chemicals. The expansion at Dahej, Gujarat, which would double capacity to 252,500 million tonnes per annum should help the company tap opportunities across its key segments.
 

The expansion is expected to support growth with revenues and profits estimated to rise by 20-25 per cent over the FY20-23 period.
 

Given valuations at 4.6 times FY23 price to sales and 38 times price to earnings ratio, analysts at ICICI Research believe the stock has little margin of safety and have a hold rating. Corrections could provide a better entry point.