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Review By Dilip Davda on September 19, 2020

•    CSCL is a mega player in HMDS, CMIC speciality chemicals.
•    It is gearing for 67% capacity expansion, to be operational by Q1 of CY2022.
•    Its revenue from exports has posted CAGR of 17.57% in last three fiscals.
•    The company enjoys a good long term relationship with major clients.
•    Speciality chemical segment is witnessing preference of investors at large.


PREFACE:
CSCL is gearing to take advantage of current India-China trade issue.  It was importing nearly 75% of its raw material from China, but ever since China-India issue crop up, it has already opened alternate sources of its raw materials from other neighbouring countries. The company is in the process of expanding its capacities by 67% and new two plants will be operational by the first quarter of CY2022. With virtual monopoly in its product line, it enjoys a higher margin per KG (kilogram) basis and thus stays insulated against the volatility of raw material as well as final product pricing.

ABOUT COMPANY:
Chemcon Speciality Chemicals Ltd.  (CSCL) is a manufacturer of specialized chemicals, such as HMDS and CMIC which are predominantly used in the pharmaceuticals industry (the 'Pharmaceutical Chemicals'), and inorganic bromides, namely Calcium Bromide, Zinc Bromide and Sodium Bromide, which are predominantly used as completion fluids in the oilfields industry (the 'Oil well Completion Chemicals'). CSCL  claims that it is the only manufacturer of HMDS in India and is the third-largest manufacturer of HMDS worldwide in terms of production in the calendar year 2019 (source: Frost & Sullivan Report). The company is the largest manufacturer of CMIC in India and the second-largest manufacturer of CMIC worldwide, in terms of production and capacity in the calendar year 2019 (source: Frost & Sullivan Report). Further, CSCL is the only manufacturer of Zinc Bromide and the largest manufacturer of Calcium Bromide in India, in terms of production in the calendar year 2019 (source: Frost & Sullivan Report).

The company supplies products to domestic customers and also export to countries including United States of America, Italy, South Korea, Germany, People's Republic of China, Japan, United Arab Emirates, Serbia, Russia, Spain, Thailand and Malaysia. In Fiscals 2020, 2019 and 2018, its revenue from exports (including Deemed Exports) contributed 39.78%, 31.99% and 47.84%, respectively of its revenue from operations.

CSCL's revenues from exports (including Deemed Exports) have grown at a CAGR of 17.57% between Fiscals 2018 and 2020. The key customers of its Pharmaceutical Chemicals include Hetero Labs Limited, Laurus Labs Limited, Aurobindo Pharma Limited, Sanjay Chemicals (India) Private Limited, Lantech Pharmaceuticals Limited, Ind -Swift Laboratories Limited, Vivin Drugs & Pharmaceuticals Limited and Macleods Pharmaceuticals Limited and the key customers of Oilwell Completion Chemicals include Shree Radha Overseas, Water Systems Specialty Chemical DMCC and CC Gran Limited Liability Company.

CSCL is an ISO 9001:2015 and ISO 14001:2015 certified company for the 'Manufacture and supply of pharmaceutical intermediates, silanes and oilfield chemicals'. Its manufacturing facility is located at Manjusar near Vadodara in Gujarat. As on the date of the Red Herring Prospectus, within its Manufacturing Facility, it currently has seven operational plants of which two plants are dedicated to the manufacturing of HMDS and ancillary products (including one plant dedicated to the manufacturing of hi-purity HMDS), one multipurpose plant, currently being used for manufacturing of HMDS and other pharmaceutical chemicals, two plants are dedicated to the manufacturing of CMIC and two plants dedicated to the manufacturing of Oilwell Completion Chemicals, along with three warehouses for the storage of products and raw materials. The company also has an in-house laboratory at its Manufacturing Facility to test raw materials procured, as well as products at the various stages of the manufacturing process. Further, it has five leased warehouses located outside Manufacturing Facility, in Manjusar, Vadodara.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its plans of capital expenditure for expansion of capacities (Rs. 41.03 cr.), working capital (Rs. 90.00 cr.), general corpus fund etc., CSCL is coming out with a maiden IPO with a combo offer of fresh equity issue (Rs. 165 cr.) and offer for sale (Rs. 153 cr.). It consists fresh equity issue of approx 4852941 shares of Rs. 10 each and offer for sale of 4500000 shares. The issue opens for subscription on September 21, 2020, and will close on September 23, 2020. The company has fixed the price band of Rs. 338 - Rs. 340 per share. Minimum application is to be made for 44 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. CSCL mulls mobilizing around Rs. 318 cr. (based on upper price band) through this IPO. Issue constitutes 25.53% of the post issue paid-up capital of the company.

Having issued/converted entire equity at par, the company also issued bonus shares in the ratio of 3 for 1 in November 2018.

The average cost of acquisition of shares by the promoters/ selling stakeholders is Rs. 0.33 and Rs. 0.57 per share. Post issue, CSCL's current paid-up equity capital of Rs. 31.78 cr. will stand enhanced to Rs. 36.63 cr. With this issue, the company is looking for a market cap of Rs. 1245.44 cr.

The issue is jointly lead managed by Intensive Fiscal Services Pvt. Ltd. and Ambit Capital Pvt. Ltd., while Link Intime India Pvt. Ltd. is the registrar to the issue.

FINANCIAL PERFORMANCE:
On the financial performance front, on a consolidated basis, CSCL has posted turnover/net profits of Rs. 158.39 cr. / Rs. 26.38 cr. (FY18), Rs. 305.33 cr. / Rs. 43.04 cr. (FY19) and Rs. 266.02 cr. / Rs. 48.85 cr. (FY20). For the last three fiscals, CSCL has posted CAGR of 29 % in revenue and 36% in PAT.

For the last three fiscals, on a consolidated basis, CSCL has posted an average EPS of Rs. 13.59 and an average RoNW of 40.30%. The issue is priced at a P/BV of 7.57 based on its NAV of Rs. 44.91 as on March 31, 2020, and at a P/BV of 4.05 based on post issue NAV of Rs. 84 (based on upper price band).

If we attribute latest earnings on fully diluted equity post issue, then asking price is at a P/E of around 25.49 against peer group P/E of 31.30. Thus prima facie issue is reasonably priced.

BRLM's TRACK RECORD:
The two Book Running Lead Managers associated with this issue have not handled public issues in the past three years.  

COMPARISION WITH LISTED PEERS:
As per offer documents, CSCL has shown Aarti Ind., Vinati Organics, Sudarshan Chemicals, Atul Ltd., Paushak Ltd., Fine Organics and Neogen Chemicals as its listed peers. Currently, they are trading at a P/Es of around 39.75, 42.48, 27.94, 31.26, 39.14, 55.64 and 55.59 (as on September 18, 2020 closing). However, they are strictly not comparable on an apple to apple basis.

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