Anupam Rasayan IPO review (May apply)

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Review By Dilip Davda on March 8, 2021

•    ARL is in custom synthesis and speciality chemical manufacturing business.
•    Life science speciality chemical has a major share in top lines.
•    Capex of Rs. 800 cr. in the last three fiscals has started bearing fruits.
•    The issue is aggressively priced based on comparison with listed peers.
•    Investors looking for long term bet may consider investing in this IPO.

ABOUT COMPANY:
Anupam Rasayan Ltd. (ARL) is one of the leading companies engaged in the custom synthesis and manufacturing of specialty chemicals in India (Source: F&S Report). It commenced business as a partnership firm in 1984 as a manufacturer of conventional products and have, over the years, evolved into custom synthesis and manufacturing of life science-related specialty chemicals and other specialty chemicals, which involve multi-step synthesis and complex technologies, for a diverse base of Indian and global customers. The company's key focus in custom synthesis and manufacturing operations is developing in-house innovative processes for manufacturing products requiring complex chemistries and achieving cost optimization.

It has two distinct business verticals (i) life science-related specialty chemicals comprising products related to agrochemicals, personal care and pharmaceuticals, and (ii) other specialty chemicals, comprising specialty pigment and dyes, and polymer additives. In Fiscal 2020 and in the nine months ended December 31, 2020, its revenues from life science-related specialty chemicals vertical accounted for 95.37% and 93.75%, respectively, of revenue from operations, while revenue from other specialty chemicals accounted for 4.63% and 6.25%, respectively, of revenue from operations, in such periods.

ARL has developed strong and long-term relationships with various multinational corporations, including, Syngenta Asia Pacific Pte. Ltd., Sumitomo Chemical Company Limited and UPL Limited that has helped it expand product offerings and geographic reach across Europe, Japan, United States and India. In particular, it has been manufacturing products for certain customers for over 10 years. In the nine months ended December 31, 2020, ARL manufactured products for over 53 domestic and international customers, including 17 multinational companies. The Government of India has also recognized the Company as a three-star export house.

According to the F&S Report, India's specialty chemicals industry is expected to grow at a CAGR of approximately 10% to 11% over the next five years, due to rising demand from end-user industries, along with tight global supply on account of stringent environmental norms in China.

As of December 31, 2020, ARL operated six multi-purpose manufacturing facilities in Gujarat, India, with four facilities located at Sachin, Surat, Gujarat and two located at Jhagadia, Bharuch, Gujarat and an aggregate installed capacity of 23,438 MT. In addition, given that company's operations are primarily export-oriented, the close proximity to Adani Hazira Port of its facilities located at Sachin, Surat, Gujarat helps in reducing freight and logistics costs.

ISSUE DETAILS/CAPITAL STRUCTURE:
To part finance repayment/prepayment of certain debts with accrued interest (Rs. 563.70 cr.), general corpus fund needs, the company is coming out with a maiden IPO by way of fresh equity issue worth Rs. 760 cr. The issue is for approx 13693698 equity shares (at the upper cap of the price) of Rs. 10 each being offered in the price band of Rs. 553 - Rs. 555 per share. Minimum application is to be made for 27 shares and in multiples thereon, thereafter. The company has reserved 220000 equity shares for eligible employees and out of the rest, it has allocated 50% QIBs, 15% HNIs and 35% for Retail investors. The company is offering a discount of Rs. 55 per share to employees.

The issue constitutes 13.71% of the post issue paid-up equity capital of the company. The issue opens for subscription on March 12, 2021, and will close on March 16, 2021.

This issue is jointly lead managed by Axis Capital Ltd., Ambit Pvt. Ltd., IIFL Securities Ltd. and JM Financial Ltd. and KFin Technologies Pvt. Ltd. is the registrar to the issue. Post allotment, shares will be listed on BSE and NSE.

Having issued initial equity at par, it raised further equity in the price range of Rs. 113.41 to Rs. 249.61 per share between November 2016 and November 2020. It has also issued bonus shares in the ratio of 9 for 1 in June 2005, 1 for 4 in July 2006, 1 for 4 in March 2011 and 4 for 1 in March 2015. The average cost of acquisition of shares by the promoters is Rs. 0.19, Rs. 1.32, Rs. 5.83 and Rs. 125.52 per share.

ARL's current paid-up equity capital of Rs. 86.21 cr. will stand enhanced to Rs. 99.90 cr. post issue. With the higher price of the IPO, the company is looking for a market cap of Rs. 5544.48 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, ARL has (on a consolidated basis) posted turnover/net profits of Rs. 349.18 cr. / Rs. 40.34 cr. (FY18), Rs. 520.96 cr. / Rs. 50.21 cr. (FY19) and Rs. 539.39 cr. / Rs. 52.98 cr. (FY20). For the first nine months of the current fiscal ended on December 31, 2020, it has earned a net profit of Rs. 48.09 cr. on a turnover of Rs. 563.16 cr. Due to essential commodity, ARL continued its operations and despite the pandemic scare, it achieved good performance. Its revenue consists 65% of exports and 35% of domestic sales.

For the last three fiscals, ARL has posted an average EPS of Rs. 6.77 and an average RoNW of 10.18%. The issue is priced at a P/BV of 5.8 based on its NAV of Rs. 95.64 per share as of December 31, 2020, and at a P/BV of 3.5 based on post issue NAV of Rs. 158.57 per share(at the upper price band).

If we annualized FY21-9M earnings and attribute it to fully diluted post issue equity, then the asking price is at a P/E of around 86.45 against an industry composite P/E of 42.81. Thus the issue appears aggressively priced on these parameters.  

NOTEWORTHY STATEMENT:
According to management, since they have completed major Capex plans of Rs. 800 crore in the last three years and expanded capacities are in operations, the company has started yielding benefits with a CAGR of 24.29% in total revenue from FY18 to 9M-FY21 and trends are expected to continue. Good relationship with global customers with repeat orders encouraged ARL to follow prudent marketing strategy.

COMPARISON WITH LISTED PEERS:
As per offer documents, ARL has shown PI Industries, Navin Fluorine, Astec Lifescience and SRF as its listed peers. They are currently trading at P/Es of around 54.21, 30.23, 28.64 and 42.51 (As of March 08, 2021). However, they are not fully comparable on an apple to apple basis.  

DIVIDEND POLICY:
The company has not paid any dividend so far, however, post listing; the company will be contemplating a prudent dividend policy, said management.

MERCHANT BANKERS TRACK RECORDS:
The four Book Running Lead Managers (BRLMs) associated with the offer have handled 27 issues in the past three fiscals, out of which 9 issues closed below the issue price on the listing date.

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