Chemplast Sanmar IPO review (May apply)

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Review By Dilip Davda on August 7, 2021

•    CSL was a listed entity and got delisted voluntarily in June 2012.
•    Its market cap was Rs. 1190 cr. while delisting in 2012.
•    It is planning re-listing at a market cap of around Rs. 8554 cr. after a decade.
•    Despite profits, it has allocated 10% for retail investors.
•    Quantum jump in the top and bottom lines in a pre-IPO year is a major concern.

PREFACE:
Chemplast Sanmar was listed on exchanges till 2012 and opted for voluntary delisting in June 2012 at a market cap of around Rs. 1190 cr. (As per BSE WEB site data). Now it is coming with a fresh attempt to get listed in the new 'AVTAR'. However, their accounting jugglery is non-elusive and non-convincing. Quantum jump in the top and bottom line in a pre-IPO year raises concern. It also went for split, consolidation, split off its face value from Rs. 10 to Re. 1, from Re. 1 to Rs. 500000, again to Rs. 10, and then for Rs. 5 per share.

Based on its consolidated negative NAV, the issue appears aggressively priced. Two third of the offer (66.23% of the issue) is secondary by way of OFS. Only 10% allocation for retail investors from this profit-making company (as claimed by the offer document) is surprising. Nearly 7.8 times valuations for fresh attempts of listing also raises concern.

ABOUT COMPANY:
Chemplast Sanmar Ltd. (CSL) is a speciality chemicals manufacturer in India with a focus on speciality paste PVC resin and custom manufacturing of starting materials and intermediates for pharmaceutical, agro-chemical and fine chemicals sectors. CSL is one of India's leading manufacturers of speciality paste PVC resin on the basis of installed production capacity, as of December 31, 2020. In addition, CSL is also the third-largest manufacturer of caustic soda and the largest manufacturer of hydrogen peroxide in the South India region, on the basis of installed production capacity as of December 31, 2020, and one of the oldest manufacturers in the chloromethane market in India. (Source: CRISIL Report)

Pursuant to the CCVL Acquisition, it acquired 100.0% equity interest in CCVL that is the second-largest manufacturer of suspension PVC resin in India and the largest manufacturer in the South India region, on the basis of installed production capacity as of December 31, 2020 (Source: CRISIL Report).

According to the CRISIL Report, high barriers to entry and limited competition is expected to benefit existing manufacturers of speciality paste PVC resin in India in the medium term and the demand for speciality paste PVC resin is expected to grow at a CAGR of 6% to 8% between Financial Years 2022 and 2025. The demand for custom manufacturing catered by Indian manufacturers is likely to grow at a CAGR of approximately 12% between Financial Years 2020 and 2025, due to the higher penetration of pharmaceutical molecule, compound and active pharmaceutical ingredient manufacturing in India and India becoming a key supplier of non-commercially available molecules or monomers or polymers.

Further, custom manufacturing for agrochemical sectors is also likely to witness a boost with discovery chemistry pertaining to the agricultural sector gaining more traction. Demand for caustic soda is also expected to grow at a CAGR of 4% to 5% between Financial Years 2020 and 2025, led by increasing demand from the alumina and chemical industries. Further, the demand in the Indian market for chloromethane and hydrogen peroxide is expected to grow at a CAGR of 8% to 9% and 6% to 7% between Financial Years 2020 and 2025, respectively. In addition, domestic demand for suspension PVC resin is expected to grow at a CAGR of 7.5% to 8.5% between Financial Years 2021 and 2025 (Source: CRISIL Report).

CSL believes that it is well-positioned to benefit from the industry growth given the chemicals industry is knowledge-intensive, involves complex chemistries, is subject to high-quality standards and stringent impurity specifications for processes and product capabilities, and is based on complex products that are difficult to replicate.

CSL is a part of the SHL Chemicals Group, which in turn is a constituent of the Sanmar Group, one of the oldest and most prominent corporate groups in the South India region. Fairfax India Holdings Corporation ('Fairfax'), a well-known international investor led by Mr Prem Watsa, based in Canada, has invested, through FIH Mauritius Investments Limited, in the SHL Chemicals Group since 2016.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its plans of early redemption of NCDs issued by the company (Rs. 1238.25 cr.) and general corpus funding, CSL is coming out with a maiden IPO worth Rs. 3850 cr. (71164503 SHARES) via book building route. It comprises a fresh equity issue for Rs. 1300 cr. (approx. 24029568 shares) and an Offer for Sale (OFS) of Rs. 2550 cr. (47134935 shares). It has fixed a price band of Rs. 530 - Rs. 541 per share of Rs. 5 each. The minimum application to be made is for 27 shares and in multiples thereon, thereafter. The issue opens for subscription on August 10, 2021, and will close on August 12, 2021. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 45.01% of the post issue paid-up capital of the company. The company has allocated 75% for QIBs, 15% for HNIs and 10% for retail investors.

The joint Book Running Lead Managers (BRLMs) to this offer are ICICI Securities Ltd., Axis Capital Ltd., Credit Suisse Securities (India) Pvt. Ltd., IIFL Securities Ltd., Ambit Pvt. Ltd., BOB Capital Markets Ltd., HDFC Bank Ltd., IndusInd Bank Ltd. and Yes Securities (India) Ltd., while KFin Technologies Pvt. Ltd. is the registrar to the issue.

Having issued initial equity at par, the company raised further equity in the price range of Rs. 25 to Rs. 100 between July 1994 and November 2013 (based on Rs. 5 FV). It has also issued bonus shares in the ratio of 2 for 3 in October 1996 as well as in November 1996. The average cost of acquisition of shares by the promoters is Rs. 1.72 and Rs. 30.14 per share.

Post issue, company's current paid-up equity capital of Rs. 67.04 cr.  will stand enhanced to Rs. 79.05 cr. Based on the upper cap of the issue price, the company is looking for a market cap of Rs. 8553.73 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three financial years, CSL has (on a consolidated basis) posted turnover/net profits of Rs. 1266.77 cr./ Rs. 118.46 cr. (FY19), Rs. 1265.51 cr. / Rs. 46.13 cr. (FY20) and Rs. 3815.11 cr. / Rs. 410.24 cr. (FY21). The company has done a revaluation of assets to show better valuations.

For the last three fiscals, the company has (on a consolidated basis) posted an average EPS of Rs. 16.74 and an average RoNW of NA. The issue is priced at a negative P/BV based on its NAV of Rs. (139.15)

If we attribute super FY21 earnings on fully diluted post issue equity, then the asking price is at a P/E of around 20.85. This P/E appears reasonable compared to peers, but mind well it is based on super earnings in the pre-IPO year.

COMPARISON WITH LISTED PEERS:
As per offer documents, CSL has shown PI Ind., SRF Ltd., Finolex Ind. And Navin Fluorine as its listed peers. They are currently trading at a P/E of around 61.92, 47.64, 13.18 and 71.48 (as of August 06, 2021). However, they are not truly comparable on an apple to apple basis.

DIVIDEND POLICY:
CSL has not declared any dividend for the last three fiscals till the filing of this offer document. It will follow a prudent dividend policy based on financial performance and future prospects post listing.

MERCHANT BANKER'S TRACK RECORDS:
The nine BRLMs associated with this offer have handled 44 public issues in the past three years, out of which 12 issues closed below the offer price on the listing date.

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