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Chemcon IPO valuations, Covid update and analyst ratings: Should you subscribe?

NEW DELHI: The Rs 318 crore Chemcon Speciality Chemicals (CSCL) IPO is all set to open for subscription on Monday, alongside CAMS’ Rs 2,242 crore IPO.

The Vadodara-based company, which serves pharma and oilwell industries, on Friday raised Rs 95.4 crore from anchor investors such as ICICI Prudential Child Care Plan Gift Plan, IIFL Special Opportunities Fund Series 7, HSBC Global Investment Funds and Mirae Asset funds, among others.

The issue would comprise of fresh issue of equity shares aggregating up to Rs 165 crore and an offer for sale of up to 45,00,000 equity shares, to be sold in the price range of Rs 338-Rs 340.

Valuation comparison
At the upper price band of Rs 340, Chemcon is available at a P/E of 25.5 times FY20 earnings per share. Chemcon is the only manufacturer of HMDS (hexamethyldisilazane) in India and is the third largest manufacturer of HMDS worldwide. Besides, it is the only manufacturer of zinc bromide and the largest manufacturer of calcium bromide in India in terms of production in 2019. The IPO will close on Wednesday, September 23.

Among its comparable peers in the listed space are Aarti Industries, Vinati Organics, Atul, Paushak, Neogen Chemicals, Fine Organics Industries and Sudarshan Chemicals. Here’s the valuation comparison table below:

Peer

Brokerage View
Geojit Financial Services: Subscribe
This brokerage said that the stock at the upper price band looks attractive when compared with its peers. It noted that the company’s revenue and PAT over FY18-20 grew at a healthy compounded annual growth rate (CAGR) of 29 per cent and 36 per cent, respectively. The company, it said, has a healthy balance sheet with stable cash flows. Its net debt was Rs 44 crore with a debt-to-equity ratio of 0.3 in FY20.
“It is well-positioned to substitute the imports from China and has an opportunity to grow total revenue at a CAGR of more than 25 per cent over FY19-FY23. Considering healthy business performance, regular capacity expansions, strong customer base, expanding margin profile and improving outlook for the sector, we have a ‘subscribe’ rating on this IPO,” it said.

Choice Broking: Subscribe with caution
Choice Broking also finds Chemcon’s IPO valued at a P/E multiple of 25.5 times at a discount to the peer average of 40 times.

It said that the company’s fundamentals look positive, but the promoter and promoter group’s corporate governance issue is making it cautious.

The management has indicated that the company will not be impacted by any means if the outcome of the appeal is not favorable.

“Also, the specialty chemical sector got re-rated in the last 5-6 months. Before re-rating, the peers were available at lower valuations. Thus, considering the above observations, we assign a ‘Subscribe with Caution’ rating for the issue,” Choice said.

Covid-19 update by management
Due to the Covid-19 pandemic and the associated lockdown, the company’s business fundamental of oil well completion chemicals has been disturbed.

Many oil exploration companies have demobilised their technical staff and shut down operations. Several new projects have been stalled across the globe. This has resulted in lower oil exploration and thereby impacted demand for oil well completion chemicals.

A third of the company’s revenues come from this segment.

The company said it is yet to resume manufacturing of oil well completion chemicals despite the unlocking of the economy.

“This demand destruction coupled with the vehicle electrification drive across the globe, we have a negative outlook on this business segment of the company,” Choice Broking said.

Other details
The company said 57.4 per cent of its revenue came from the pharma segment in FY20. Out of this, HMDS accounted for 43.8 per cent of revenues. Geojit is positive on the company’s pharma segment.

Oil Well completion chemicals accounted for the rest 33.5 per cent of the company’s revenues in FY20.

Nearly 10.2 per cent of its revenues are derived from export of pharma chemicals and another 29.6 per cent from export of oil well completion chemicals. The company, thus, derives 40 per cent of the revenue from operations from exports in FY20 and has recorded a CAGR of 17.6 per cent over FY18-FY20.

The company derives nearly 60 per cent of its revenues from top five customers. It procures raw materials from China. But the percentage of raw material in total expenditure is limited to 20.5 per cent.

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