Chemcon Specialty Chemicals Ltd. - IPO Note
Price Band: Rs. 338-340
Issue Date: 21-23 Sept
Chemcon Specialty Chemicals Ltd (Chemcon) is a manufacturer of specialised chemicals, such as HMDS (hexamethyldisilazane amine) and CMIC ((chloromethyl isopropyl carbonate), which are predominantly used in the pharmaceuticals industry, and inorganic bromides, namely Calcium Bromide, Zinc Bromide and Sodium Bromide, which are predominantly used as completion fluids in the oilfields industry (the “Oilwell Completion Chemicals”).
Details & Objects of the Issue:
The issue of Rs 318 cr (at upper band) comprised of Rs 165 cr fresh issue and Rs 153 cr Offer for Sale. The company intends to fund capex and working capital from the fresh issue
- Benefit of capacity expansion of FY20 in near term - The company has tripled its CMIC capacity from 600 MT to 1800 MT in last 3 years in addition to doubling of oil well completion chemical’s capacity. Chemcon has also more than doubled its HMDS capacity in FY20. With higher capacity being available now, the company’s HMDS revenues are likely to grow by 15-20% over CY19-23.
- Further Increase in capacity by around 60% mainly in pharma division – Chemcon has total volumetric reactor capacity of 374.85 KL, as on July 31, 2020. With the IPO money, it plans to build two additional plants with a total volumetric reactor capacity of 251 KL.
- High ROE profile – The company enjoys high return ratios due to constant EBIDTA/ton and high Asset turnover (2.8x in FY20). However, it has moderated in last couple of years due to recent capex, which is likely to improve once the capacity utilisation improves.
Valuation and Recommendation:
Between FY18-20 Chemcon’s revenues have grown at CAGR of 29% while PAT grew at higher rate of 36% CAGR. The management believes the company can grow at 15-18% CAGR for next 2-3 years. EBITDA/ton is expected to remain steady although volumes are likely to improve on the back of (a) strong demand outlook (b) expanded capacity. The issue price commands P/E of 25.5x (FY20) at the upper price of band of Rs 338-340, which is well within the industry range. We recommend “Subscribe” on the issue for listing gains.
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