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Review By Dilip Davda on November 4, 2022

•    ACIL enjoys the status of leading specialty marine chemicals and exporter of bromine, industrial salt, and sulphate of potash.
•    Its ongoing downstream expansion has started bearing fruits
•    Based on FY23 earnings, the issue appears reasonably priced.
•    Investors may consider investing in this blue chip in the offing. 

ABOUT COMPANY:
Archean Chemical Industries Ltd. (ACIL) is a leading specialty marine chemical manufacturer in India and focused on producing and exporting bromine, industrial salt, and sulphate of potash to customers around the world. (Source: Company Commissioned F&S Report). According to Frost & Sullivan, ACIL is the largest exporter of bromine and industrial salt by volume in India in Fiscal 2021 and has amongst the lowest cost of production globally in both bromine and industrial salt. (Source: Company Commissioned F&S Report). 

The company produces products from its brine reserves in the Rann of Kutch, located on the coast of Gujarat, and manufactures products at its facility near Hajipir in Gujarat. As of June 30, 2022, it marketed products to 18 global customers in 13 countries and to 24 domestic customers. ACIL's bromine is used as key initial-level material, which has applications in pharmaceuticals, agrochemicals, water treatment, flame retardant, additives, oil & gas, and energy storage batteries. Industrial salt is an important raw material used in the chemical industry for the production of sodium carbonate (soda ash), caustic soda, hydrochloric acid, chlorine, bleaching powders, chlorates, sodium sulphate (salt cake), and sodium metal. Sulphate of potash is used as a fertilizer and also has medical uses. 

In the three months ended June 30, 2022, and in Fiscal 2022, Fiscal 2021, and Fiscal 2020, it exported 34.88%, 44.88%, 46.10%, and 39.79%, respectively, of bromine production abroad, mainly to China. The balance of bromine production is sold in the domestic market. Bromine is a highly corrosive, hazardous and toxic chemical and its handling requires a high degree of specialized expertise which ACIL has developed. The transportation of bromine is also dangerous and requires nickel and lead-lined ISO containers, of which ACIL had 228 such containers (owned and leased) for export business as of June 30, 2022. According to Frost & Sullivan, the bromine global market size was US$3.13 billion in CY2021, and the market is expected to grow at a CAGR of 5.8% between CY2020 and CY2025. (Source: Company Commissioned F&S Report). In addition, Frost & Sullivan anticipates a growing demand for bromine and bromine performance derivatives driven by a host of factors including an increasing demand for flame retardants, increasing consumption of oil well chemicals and increasing use of hydrogen and zinc bromide in flow batteries. (Source: Company Commissioned F&S Report). In response to this demand, the company intend to and is in the process of, increasing manufacturing capacity for bromine production. In addition, plan to expand the product line into bromine derivative performance products in the next two-to-three years, in particular brominated flame retardants, clear brine fluids and bromine catalysts used for the synthesis of pure terephthalic acid ("PTA").

Industrial salt has a high demand due to the diversity of applications in the oil & gas industry, Chlor-alkali industry, and de-icing chemical industry. According to Frost & Sullivan, ACIL was the largest exporter of industrial salt in India with exports of 2.7 million MT in Fiscal 2021 (Source: Company Commissioned F&S Report). In the three months ended June 30, 2022, and in Fiscal 2022, Fiscal 2021 and Fiscal 2020, it exported 100% of industrial salt production, primarily to customers in Japan and China. According to Frost & Sullivan, global demand for industrial salt was 173 million MT in CY 2017, 171 million MT in CY 2018 and 173 million MT in CY 2019 and declined to 153 million MT in CY 2020 but is expected to grow at a CAGR of 2.8% between CY2020 and CY2025. (Source: Company Commissioned F&S Report). Frost & Sullivan anticipates a growing demand for industrial salt will be driven primarily by increasing industrialization owing to its wide range of industrial applications. In particular, demand is expected to increase from the food and beverage industry, the Chlor-alkali sector in the chemical industry as well as chemical processing, water treatment, agriculture and de-icing. (Source: Company Commissioned F&S Report).

Sulphate of potash, also known as potassium sulphate, is a high-end, specialty fertilizer for chlorine-sensitive crops and also has medical uses to reduce the plasma concentration of potassium when hypokalemia occurs. ACIL is the only manufacturer of sulphate of potash from natural sea brine in India. (Source: Company Commissioned F&S Report). According to Frost & Sullivan, global demand for sulphate of potash was 6.9 million MT in CY 2021 but is expected to grow at a CAGR of 6.0% between CY2021 and CY2025. (Source: Company Commissioned F&S Report). The sulphate of potash market is being driven by the advantages of sulphate potash over muriate of potash and growing demand from a growing middle-class population driving the use of fertilizers primarily for growing fruit and vegetables. (Source: Company Commissioned F&S Report). 

The company aims to be the key producer and supplier of sulphate potash in India. Its marine chemicals business is predominately conducted on a business-to-business basis both in India and internationally. ACIL is an export-oriented business, and, in the three months ended June 30, 2022, and in Fiscal 2022, Fiscal 2021 and Fiscal 2020, 66.74%, 70.32%, 74.41% and 78.41%, respectively, of revenue from operations were attributed to export sales. The key geographies to which it exports products include China, Japan, South Korea, Qatar, Belgium and the Netherlands. Some of its major customers include Sojitz Corporation, which is also a shareholder in the Company, Shandong Tianyi Chemical Corporation, Unibrom Corporation, Wanhau Chemicals and Qatar Vinyl Company Limited. As of June 30, 2022, its manufacturing facility had an installed capacity of 28,500 MT per annum of bromine, 3,000,000 MT per annum of industrial salt and 130,000 MT per annum of sulphate of potash. As of June 30, 2022, ACIL had 250 employees and over 400 contract workers.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its need for redemption/early redemption of NCDs issued (Rs. 644.00 cr.), and general corporate purposes, ACIL is coming out with a combo issue of equity shares via book building route. The company has proposed to issue fresh equity shares worth Rs. 805 cr. (approx. 19778868 shares at the upper cap of the IPO pricing), and an Offer for Sale (OFS) of 16150000 equity shares (worth Rs. 657.31 cr. at the upper cap). Thus the overall size of the issue will be approx. 35928868 shares worth Rs. 1462.31 cr. (at the upper cap). The company has announced a price band of Rs. 386 - Rs. 407 per share of Rs. 2 each. A minimum application is to be made for 36 shares and in multiples thereon, thereafter. The issue opens for subscription on November 09, 2022, and will close on November 11, 2022. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 25.81% of the post-issue paid-up equity capital of the company. 

As per regulation 6(2) of the SEBI ICDR, it has allocated 75% for QIBs, 15% for HNIs, and 10% for Retail investors. The joint Book Running Lead Managers (BRLMs) to this issue are IIFL Securities Ltd., ICICI Securities Ltd., and JM Financial Ltd. while Link Intime India Pvt. Ltd. is the registrar to the issue. 

Having issued initial equity shares at par, ACIL issued/converted further equity shares in the price range of Rs. 9.68 to Rs. 90.02 (based on FV of Rs. 2 per share) between March 2011 and October 2022. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 9.68, Rs. 11.80, Rs. 11.86, Rs. 11.96, and Rs. 36.57 per share. 

Post-IPO, ACIL's current paid-up equity capital of Rs. 20.66 cr. will stand enhanced to Rs. 27.84 cr. Based on the upper cap of IPO pricing, the company is looking for a market cap of Rs. 5665.56 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, the company has reported standalone data only for FY21, while it has shown consolidated data for FY20 and FY22 and also for Q1 of FY23. As per the information given in the offer documents, it has posted a turnover/net profit (loss) of Rs. 617.01 cr. / Rs. - (36.22) cr. for FY20 (conso.), Rs. 754.79 cr. / Rs. 66.61 cr. for FY21 (standalone), and Rs. 1142.83 cr. / Rs. 188.58 cr. for FY22 (conso.). On a consolidated basis, for Q1 of FY23, it earned a net profit of Rs. 84.41 cr. on a turnover of Rs. 408.82 cr. Thus it has posted remarkable performance for the last 15 months. According to the management, the loss for FY20 is attributed to one-time special provisioning and amortizations. 

For the last three fiscals, ACIL has posted an average EPS of Rs. 10.70 and an average RoNW of - (34.05%). The issue is priced at a P/BV of 12.17 based on its NAV of Rs. 33.45 as of June 30, 2022, and at a P/BV of 4.34 based on its post-IPO NAV of Rs. 93.76 (at the upper cap). 

If we annualize FY23 earnings and attribute it to the fully diluted post-IPO paid-up equity capital, then the asking price is at a P/E of around 16.78. 

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It will adopt a prudent dividend policy based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer documents, ACIL has shown Tata Chemicals, Deepak Nitrite, Aarti Ind., and Neogen Chemicals as their listed peers. They are currently trading at a P/E of around 27.44, 70.42, 20.27, and 77.39 (as of November 04, 2022). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORDS:
The three BRLMs associated with this issue have handled 74 public issues in the past three fiscal years, out of which 24 issues closed below the offer price on the listing date. 

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