Chemcon IPO Financial Analysis (Subscribe)

Strengths

The only manufacturer of HMDS in India and third largest manufacturer worldwide (in terms of production). The largest manufacturer of CMIC in India and the second largest worldwide in terms of production.
Presence in domestic and international markets.
Consistently strong financial track record with strong operating margins of 28% and net margins of 19% in FY20.
Well-equipped in house testing laboratories for new product development.
The capability of expanding the production volumes.
Nearly debt-free.

Challenges

Limited product portfolio; revenue concentration on pharmaceuticals segment.
Concentrated client base; the top five customers contributed 59% of revenue from operations.
High working capital requirement.

Chemcon is coming up with an issue of 9,352,940 equity shares amounting to Rs 318 crore. IPO comprises of

A fresh issue of 4,852,940 equity shares amounting to Rs 165 crore.
Offer for sale of 4,500,000 equity shares amounting to Rs 153 crore.

Objects of the offer

Capex towards the expansion of manufacturing facility (Rs 41 crore)
To meet working capital requirements (90 crore)

Issue open date: 21^st Sept. 2020

Issue close date: 23^rd Sept. 2020

About the company

Manufacturer of specialised chemicals, such as HMDS and CMIC predominantly used in the pharmaceuticals industry (the “Pharmaceutical Chemicals”), and inorganic bromides, namely Calcium Bromide, Zinc Bromide and Sodium Bromide, predominantly used as completion fluids in the oilfields industry.
The products are exported to the United States of America, Italy, South Korea, Germany, China, Japan, the United Arab Emirates, Serbia, Russia, Spain, Thailand and Malaysia.
The key customers of pharmaceutical chemicals include Hetero Labs Limited, Laurus Labs Limited,AurobindoPharma Limited, Sanjay Chemicals (India) Private Limited, Lantech Pharmaceuticals Limited, Ind -Swift Laboratories Limited, Vivin Drugs & Pharmaceuticals Limited and Macleods Pharmaceuticals Limited and the key customers of Oilwell Completion Chemicals include Shree Radha Overseas, Water Systems Specialty Chemical DMCC and CC Gran Limited Liability Company.
The manufacturing facility is located at Manjusar near Vadodara in Gujarat.
In Fiscals 2020, 2019 and 2018, the pharmaceutical chemicals segment contributed 63.75%, 63.14% and 62.18% of our total revenue from operations respectively while Oilwell Completion Chemicals, contributed 33.47%, 35.30% and 35.63% respectively of total revenue from operations.
Top five customers and our top ten customers contributed 59.35% and 72.26%, respectively of our total revenue from operations in Fiscal 2020, as compared to 45.94% and 67.56%.

Financial Review/Financial Performance

Total revenue for the year ended has reduced to Rs 266.02 crore in FY 20 from Rs305.33 crore in FY 19. However, PAT has increased by 13% to Rs 49.34 crore in FY 20 (Rs 43.41crore in FY 19). Chemcon has robust operating and net margins throughout the last three fiscal years. RoNW is strong at 33% in FY 20. Cash generated from operations is Rs 10.5 crore in FY20.

In the Fiscals 2020 2019 and 2018, 39.78%, 31.99%, and 47.84% of revenue from operations was from exports.

Pharmaceutical chemicals were categorized as essential goods during the lockdown but the reduced demand for oil and gas in Fiscal 2021 has resulted in reduced demand for Oilwell Completion Chemicals.

Table 1 - Financials and Ratios (Amount in Rs Crore)
Title	FY2020	FY2019	FY2018
Total Revenue	266.02	305.33	158.40
PAT	49.34	43.41	26.56
EBITDA	74.22	68.06	45.85
Total Accets	225.80	173.03	97.07
Cash and cash equivalents	14.10	10.98	0.15
CFO	10.50	11.06	14.13
Gross profit margin(%)	27.90	22.29	28.95
Net profit margin(%)	18.55	14.22	16.77
EPS	15.37	13.54	16.77
Return on new worth(%)	33.71	44.74	34.29

Conclusion

Chemcon has consistently shown strong financial performance P/E at 22.12 (at higher price band) makes the issue appears reasonably priced and the industry peer group average P/E is about 31.30. The peers include Aarti Industries, Vinati organics, Neogen Chemicals and several other players and directly it is comparable to Paushak Limited which has a P/E of 31.23.

The expansion of the manufacturing facility with IPO proceeds would result in increased total volumetric reactor capacity at the manufacturing facility from 374.85 KL to 625.85 KL. Also, Chemcon aims to market their products in other industries like rubber and semiconductor manufacturing. India is currently a net importer of both HMDC and CMIC; Chemcon being the only producer of HMDS in India aims to capitalize on this business opportunity by substituting imports and catering to India’s growing HMDS market. Thus one may subscribe to the IPO for listing gains and long term as well.

Reviewer recommends Subscribe to the issue.

Review By CA Priyanka Choudhary on 11th Sep 2020

Review Author

About CA Priyanka Choudhary

CA Priyanka Choudhary, a freelance chartered accountant

Priyanka Choudhary Jain is a Chartered Accountant and an experienced credit analyst. She has worked with CRISIL as Senior Credit Analyst on ratings assignments including business and financial analysis in Corporates as well as the Public Finance Sector.

Email: [email protected]

DISCLAIMER: No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor prior to making any actual investment decisions, based on information published here. Any reader taking decisions based on any information published here does so entirely at own risk. Investors should bear in mind that any investment in stock markets are subject to unpredictable market related risks. Above information is based on RHP and other documents available as of date coupled with market perception. Author has no plans to invest in this offer.