Chemcon Speciality Chemicals Limited – IPO Review & Complete Company Analysis

About
IPO:

Chemcon Speciality
chemicals plans to raise Rs. 318 Crore from its three-day IPO starting from 21st
Sept 2020 – 23rd Sept 2020. The price band of the issue is been fixed at Rs.338
– Rs. 340 per share. 

Objects of the issue: Capital Expenditure (to expand manufacturing facilities), Working Capital Requirements, & General Corporate purposes.

Company:

Incorporated in 1988, Vadodara-based Chemcon
Speciality Chemicals Ltd. (“CSCL” or “the Company”) is a leading manufacturer of specialised
chemicals. The Company has mainly two business segments “Pharmaceuticals Chemicals”
and “Oilwell Completion Chemicals”.

·      
The Pharmaceuticals Chemicals comprise
of specialised chemicals such as “HMDS” and “CMIC”, that are used in the process
of producing anti-viral and anti-bacterial drugs and a drug for the treatment of
tuberculosis. Apart from this, the Company is the only manufacturer of HMDS and
largest producer of CMIC in India and is the third-largest manufacturer of HMDS and the second-largest manufacturer of CMIC worldwide. The Pharmaceuticals Chemicals
contribute 64% of the total revenue.

 

·      
The Oilwell Completion Chemicals are
used in the process of oil and gas exploration. Basically, it is used in making
the well ready for extraction purpose post the drilling process. Under this
segment, the Company produces chemicals such as Calcium Bromide, Zinc Bromide
and Sodium Bromide that are predominantly used as completion fluids in the oilfields
industry. CSCL is the only manufacturer of Zinc Bromide and the largest
manufacturer of Calcium Bromide in India. The Oilwell Completion Chemicals contribute
36% of the total revenue.

Management:

The Company has a
strong and experienced management team who have specialisation in the fields of
finance, manufacturing, quality control, strategy, raw material sourcing,
process re-engineering and business development.

 

·      
Kamal Kumar Rajendra Aggarwal is
the Chairman and Managing Director of the Company. He holds a diploma in
petrochemical technology and has more than 23 years of experience in the specialised
chemicals industry. He is on board since 2004.

 

·      
Rajesh Chimanlal Gandhi is a Whole-time
director and the Chief Financial officer of the Company. He holds a bachelors
degree in commerce and has more than 20 years of experience in finance and
accounts. He is on board since 2012.

 

·      
Navdeep Naresh Goyal is
the Deputy Managing Director of the Company. He is a 12th pass out and holds
more than 10 years of experience in operations. He is on board since 2015.

The Promoters hold 100%
shareholding of the company which will further drop down to 74.5% post-initial public
offer.

 

Financials
Analysis:

1.    
The revenue is increasing at a CAGR of 29%, whereas the revenue
has been declined by 13.9% during FY20. 

2.    
Despite lower revenue in FY20, the EBITDA margins have grown by
6.3%, (whereas CAGR stands at 25%) and the Net profit margins have grown by
13.4% (whereas CAGR stands at 36%)

 

3.    
The ROE stands at 43.2% and ROCE at 36.7%

 

4.    
The Company is trading at a P/E of 22.1x based on the upper price
band.

(Opinion:
The closest peers Neogen Chemicals, Paushak, Atul and Aarti Industries are
trading at 57.0x, 37.6x, 29.6x and 35.6x respectively (based on FY20 EPS). So, we
can say the valuation of CSCL is cheaper as compared to its peers and we can
expect a higher stock premium post IPO and better growth prospects in the
long-run)

 

5.    
In FY20, around 40% of the total revenue is derived from exports
and have been constantly growing at a CAGR of 17.57%.

Pros:

1.    
The Company is a leading manufacturer with respect to both the business
segment i.e. Pharmaceuticals Chemicals and Oilwell Completion Chemicals in
domestic as well as international market.

 

2.    
The Company has a diversified customer base worldwide and due to
their long-standing relationship with clients, they are able to retain market
presence and increase their products reach to new customers. (For instance: Aurobindo
pharma limited. are their clients from the past 20 years and around 68.61% of total
revenue is derived from repeat customers)

 

3.    
Strong and Experienced Management team.

 

4.    
The company is willing to expand its production capacity by more
than twice the current level, which will boost its revenue and help them in dominating
the untapped market. (one of the major objectives of public issue)

 

Cons:

1.    
The Company’s “Oilwell completion chemicals” might face a drop-in
revenue due to global lockdown, which has indirectly affected the consumption
of crude oil. Due to low crude oil demand, the oil extraction activity has been
temporarily reduced thus affecting the demand for completion chemicals.

 

2.    
The major chunk of net profit is solely dependent on the Company’s
single product line i.e. “HMDS” (43.79%).

 

3.    
High Customer Concentration: Almost 59% of the revenue is been generated
from the top 5 clients. If any customer pulls out, it might severely affect the
top line of CSCL.

 

4.    
The company heavily relies on China for procuring some of its raw
material. As per the current scenario, India is not in good terms with China
and thus any adverse policy change might impact the company’s input cost to a
larger extent.

Source: Chemcon Speciality Chemicals – RHP

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