Published on 22/09/2020 10:33:00 AM | Source: ICICI Direct

IPO Note - Chemcon Speciality Chemicals Ltd By ICICI Direct

Posted in IPO Reports| #IPO #ICICI Direct

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Chemcon Speciality Chemicals

Chemcon Speciality Chemicals is a manufacturer of specialised chemicals, such as HMDS (hexamethyldisilazane) and CMIC (chloromethyl isopropyl carbonate), which are predominantly used in the pharmaceuticals industry. Further the company also manufacturers inorganic bromides namely Calcium Bromide, Zinc Bromide and Sodium Bromide, which are predominantly used as completion fluids in the oilfields industry. It is the only manufacturer of HMDS in India and were the third largest manufacturer of HMDS worldwide in terms of production.


Anti-China sentiments likely to aid performance for Chemcon

Chemcon is present into HMDS, CMIC and Oil field chemicals. Since, China being the largest player into HMDS and CMIC with total capacity to the tune of 50-60% of the global market, it is one of the major exporter of these two chemicals across the world. India also imports to the tune of ~40% of HMDS (Demand of ~4000 MT) and ~60% of CMIC (Demand of 2530 MT), which majorly comes from China. Post Covid-19, there has been anti-china sentiments across the world, which we expect to benefit Chemcon given that it has already expanded capacity for HMDS and likely to increase capacity for CMIC in the coming time. It is evident that the company could likely to capture import share in the years to come in a view that it maintains pricing dynamics in line with the Chinese players.


Upcoming Capex likely to boost pharma chemical revenue & OPM

The company has recently increased its capacity for HMDS from 1800 MT to 4800 MT (~600 MT high purity HMDS and rest normal HMDS). Further, the company also plans to utilise around | 41 crore from the IPO proceeds for the expansion of CMIC, which should likely to expand company’s processing capacity by ~60%. We believe the company enjoys higher realisations in its pharma chemical business as compared to oil field chemicals and thus, it is evident that these two business verticals will likely to grow at decent pace in the coming few years on the back of import substitution. This should provide better OPM visibility for medium term.


Key risk & concerns

* Pricing pressure from China to impact performance ahead

* High working capital remains a key risk for balance sheet


Priced at P/E of 25.5x (post issue) FY20 on upper band

Since CMIS goes into Tenofovir and with expectations of better growth outlook from the aforementioned drug over the period, one can expect better growth outlook for the company. Further, increase in the capacity for both HMDS and CMIS by Chemcon, one should expect pharma chemical business revenue to be more tilted to the group revenue ahead and thereby the operational performance. At the higher end of the price band of | 340, the stock is available at a P/E of ~25.5x (on post issue basis) and EV/ EBITDA of ~15.8x (post issue). We have a SUBSCRIBE rating on the issue.


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