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Capital raise to help diversify into high-margin fluorospecialities

Capital raise to help expand capacity and solidify balance sheet: Laxmi Organics (LO) is looking to raise Rs6bn through a mix of fresh issue (Rs3bn, 23.25mn shares) and Offer for Sale (Rs3bn). Large part of the proceeds (including Rs2bn raised in pre-IPO placement as part of fresh issue) shall be utilized for 1) debt repayment (~Rs1.8bn), 2) establishing Fluorospecialty assets (~Rs1bn), and 3) capacity expansion (~Rs1bn).

* Fluorospecialty chemistry to provide superior growth opportunities, aid margin expansion: In 2019, LO’s subsidiary Viva Lifesciences (VLPL) acquired assets of Italybased Miteni SPA (EUR4.6mn), which manufactures fluorospecialities and electrochemicals. LO plans to establish these assets in India by Q4FY22 (13.8ktpa), which can add ~Rs3.5bn revenue (~22% of the current topline) at peak utilization. Given the high EBITDA margin profile (~24-26% in fluoro space vs. 8-9% current margin of LO) and large export potential (from previous customers of Miteni), LO can improve its operating margins substantially in the long term.

* Sole manufacturer for Diketene Derivatives (DKD) in India; import substitution possibilities: With a ~55% market share in India’s DKD market and the rest being imported into India (40%, implying ~Rs4bn additional market opportunity), LO is in a sweet spot to gain further market share in the wake of the import substitution trend and ‘Make in India’ thrust. The Pharma/Agro industries make up 36%/15% of LO’s standalone sales.

* Capacity addition and long-term contracts boost topline visibility: LO operates under two verticals, Acetyl Intermediates (AI) and Specialty Intermediates (SI). AI accounts for 59% of total sales, while SI accounts for 32% of total sales. The planned capacity expansion at the SI division (~4.5ktpa with a cost of ~Rs820mn) and the AI division (~40 ktpa at a cost of ~Rs400mn) will be operational by FY22-end and will aid revenue growth in FY23, given strong demand in both the segments. LO has recently entered into a longterm agreement for the sale of an agro intermediate to a large crop sciences company, which will provide sustainable revenue growth.

* Outlook and valuation: We believe that LO will report better growth than the industry in both the divisions (AI & SI), driven by increasing capacities, strong customer relations, long-term intermediate contracts, favorable product mix and better demand environment. Entry into the complex high-margin fluorochemicals space will open up new growth avenues for the company along with margin expansion. At the upper price band of Rs130, the stock is available at 77x FY20 Adj. EPS post issuance. LO recorded a 17% EPS CAGR during FY16-20.

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