Chemplast Sanmar IPO: Key Highlights to Know

Chemplast Sanmar IPO opens for subscription on 10th August. The company is looking to raise Rs 3,850 crore through the public issue. Here are the details:

Chemplast Sanmar IPO Date: 10th August - 12th August 2021

Chemplast Sanmar IPO Price band: Rs 530 - 541 per share

Issue Size: Rs 3,850 crore (Fresh Issue: Rs 1,300 cr & Offer for sale: Rs 2,550 cr)

Post Issue Implied Market Cap: ₹ 8,406 – 8,554 Cr

Reservation: QIB 75%, Retail - 10%, NII 15%.

Bid lot: 27 shares, and in multiples of 27 shares

IPO Objective

The fund raised from the IPO will be utilized:

• for early redemption of Non Convertible Debentures (NCDs) issued by the company in full.

• to meet general corporate purposes.

About Chemplast Sanmar

• Chemplast Sanmar has decades of experience in chemical manufacturing. The company was established in 1985, and now it is a leading specialty chemical manufacturer in India.
• The company is engaged in the manufacturing of specialty paste PVC resin, intermediates, and starting material for agro-chemical, agro-chemical, fine chemical sectors, and pharmaceuticals.
• It is also the 3rd largest manufacturer of caustic soda and the largest manufacturer of hydrogen peroxide, each in the South India region, based on installed production capacity as of December 31, 2020.
• It has four manufacturing facilities, one is located in Puducherry at Karaikal, and three are situated at Mettur, Berigai, and Cuddalore in Tamil Nadu.

Products

Specialty paste PVC resin - It is used by end-user industries to produce artificial leather, gloves, conveyor, coated fabrics, and tarpaulin. 

Custom Manufacturing operations - It custom manufactures starting materials and intermediates for multinational innovator companies in the pharmaceutical, agro-chemical, and fine chemicals industry. 

Caustic soda - It is generated as a joint product in the process of manufacturing chlorine. The product finds application in a number of industries like textiles, water treatment, paper, pulp, etc.

Chloromethanes - It refers to a group of products namely, methyl chloride, methylene chloride, chloroform, and carbon tetrachloride. 

Financials

• Chemplast acquired 100% stake in CCVL, second-largest manufacturer of suspension PVC resin in India. Hence, the company’s financial statements for FY21 includes the effect of the financial condition of CCVL from April 1, 2020. This explains such inflated numbers for FY21.
• In FY21, The revenue from CCVL was Rs 2500 cr, EBITDA was around Rs 580 cr and the Net profit was Rs 267 cr.
• At the standalone level, Chemplast Sanmar had revenue of Rs 1299 cr in FY21, a YoY growth of 0.3% only.
• The net profit in FY21 was almost 9x of FY20’s net profit.
• After paying off the NCDs from the IPO proceeds, the company is expected to be debt free.

Listed Peers

The company operates in a highly competitive market and has many listed peers. The top listed peers are PI Industries, SRF, Finolex Industries, Navin Fluorine International.

• Among the listed peers, only Finolex Industries manufactures specialty paste PVC resin in India other than Chemplast.
• In terms of revenue, Chemplast Sanmar (revenue of Rs 3,818.11 crore) is fairly placed at third position after SRF (Rs 8,454.63 crore revenue) and PI Industries (Rs 4,701.90 crore revenue).
• Chemplast Sanmar has reported a negative net worth in the previous year, due to the adjustment of Capital Reserve after acquisition of CCVL. As a result, the RoNW is also negative.

USP

Well-positioned to capture favorable industry dynamics - The demand for all the products that the company manufactures is expected to grow in the coming years at a CAGR of 6 to 12%. Chemplast is well placed to capture a large part of increasing demand.

Company is in high entry barrier industry - Chemical industry has high entry barriers, meaning, it is not easy for new companies to take entry and disrupt the business of existing players. The custom manufacturing industry has significant entry barriers, including customer validation and approvals, high-quality standards, stringent specifications, and expectations from customers for process innovation and cost reduction.

Vertically integrated operations - The company has a stable supply of raw materials, a competitive cost structure, and flexible manufacturing planning. All these factors give them significant advantages over other companies.

Growth Potential

Expanding of production capacities - Specialty based PVC manufacturing is a growing industry. There is a supply shortage in the Indian market and hence, 45% of it is met by imports. Currently, it is a two player industry with Chemplast having 82% market share of the domestic supply. Chemplast aims to increase its production capacity to meet the supply shortage.

Developing a new product portfolio - Chemplast Sanmar plans to develop or improve existing products and processes to meet the demands of existing customers. It also plans to enhance the performance of its specialty products. Chemplast can leverage its position to cater to customers across new industry verticals and in new geographies which gives them growth opportunities.

Improving operational efficiencies - The company plans to manage its working capital more efficiently that will help them free up additional capital to support the growth of the business.

Risks

Pledged shares - Chemplast has pledged 100% of its holding of CCVL with HDFC. Not being able to pay off their debt can lead to them losing their ownership of the company.

The Covid Impact - If there is a further lockdown in the future because of the third wave, it could affect the company's operation and financial condition. Last year, because of lockdown, the revenue of the company was significantly impacted as their customer 

Heavy dependency on Specialty paste PVC resin - A major part of the company's revenue comes from sales of PVC resin and in the future also it will contribute a significant majority of total revenue. If there is any reduction in the demand for specialty paste PVC resin, it could have an adverse effect on the business, results of operations, cash flows, and financial condition of the company.

Dependency on top customers - The top 10 customers contribute 38% of its total revenue. There are no long-term commitments with any of the key customers. Hence, if the company is not able to retain its top customers, the revenue will be impacted.

Chemplast Sanmar IPO: INDmoney Recommendation

Chemplast Sanmar has reported super topline and bottomline numbers in the previous year, mainly due to the acquisition of CCVL (Chemplast Cuddalore Vinyls ltd). Hence, the numbers are not comparable with the previous year. In FY20, the company’s operations were severely impacted due to Covid-19 pandemic, as indicated by a 61% drop in its bottomline in FY20.  

The company is attempting to re-list on the exchanges after a period of 9 years. It had earlier opted for voluntary delisting in June 2012 at a market cap of around Rs. 1,190 crore. The post-issue implied market cap is 7.5x higher than the mcap at delisting. 

At the higher end of the price band, Chemplast Sanmar is priced at a P/E 20.85 times FY21 earnings per share (on a post-issue) fully diluted basis. While this appears reasonable as compared to other listed peers such as PI Industries (58.9 times), SRF (24.7 times), Navin Fluorine (73.8 times), Chemplast had seen super-normal profits in the previous year, which may not be sustainable. In case we consider FY20 earnings, then the IPO is aggressively priced at a P/E ratio of more than 300 times. 

Given factors such as tepid growth in topline (without impact of CCVL acquisition), decline in profits, and steep valuations (based on FY20 earnings), we remain ‘Neutral’ on the prospects of this issue. However, given a fancy for specialty chemical players in the market, the issue may still see strong subscription. Hence, investors with a higher risk appetite may consider investing for listing gains.