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Published on 21/09/2020 1:42:15 PM | Source: Motilal Oswal Financial Services Ltd

IPO Note - Chemcon Speciality Chemicals Ltd By Motilal Oswal

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Chemcon Speciality Chemicals Ltd (Chemcon) is the speciality chemicals manufacturer of Pharma Chemicals (HMDS, CMIC) and Oilwell Completion Chemicals (inorganic bromides).

 

Leading manufacturer globally for Pharma Chemicals and in India for Oilwell Completion Chemicals: Chemcon is the only manufacturer of HMDS in India and 3rd largest globally. It is also the largest player of CMIC in India and 2nd largest worldwide. Additionally, Chemcon is the only manufacturer of Zinc Bromide and the largest of Calcium Bromide in India. 40% of the revenues come from export which has grown at a CAGR of 18% over FY18-20. Chemcon enjoys high entry barriers which leads to client stickiness and long standing relationships.

 

Expanding capacity and geographic reach: Chemcon plans to set up two more plants for manufacture of Pharma Chemicals (capex of INR410mn), which would increase its capacity from 375KL to 626KL (operational by FY22 end). This will help Chemcon expand its reach in India which is currently net importer of HMDS/ CMIC. Chemcon also aims to expand its product portfolio and usage of its existing products to other industries. Healthy Financials: Over FY18-20, Chemcon’s revenue/EBITDA/PAT grew at a CAGR of 29%/25%/36%, led by volume and price growth. Its EBITDA margins are strong at 26.8% in FY20 given the leadership position and high complex nature products. Given continuous capex incurred over the last three years, the return ratios have tapered down, though healthy with ROE/ROCE at 40%/33% in FY20.

 

Issue Size: The INR3.2bn IPO consists of fresh issue of INR1.7bn and OFS (4.5mn shares by promoter) of INR1.5bn which would result in promoter’s stake reducing from 100% pre-IPO to 74.5% post-IPO. The funds raised from fresh issue will be utilized to fund capex, meet working capital requirements and for general corporate purpose.

 

Valuation & View:

At the higher end of the price band, the issue is valued at 25.5x FY20 P/E (fully diluted), which is reasonable compared to peers. We like Chemcon given its (1) leadership position in niche products, (2) high entry barriers and (3) healthy financials. Hence, investors can Subscribe to the IPO. 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. Risk: (1) Client concentration, (2) limited product portfolio and (3) criminal proceeding against a member of promoter group.

 

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