Laxmi Organic IPO review (May apply)

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Review By Dilip Davda on March 10, 2021

•    LOIL is one of the leading manufacturers of AI and SI.
•    Higher provisions for depreciation and amortization lowered its bottom line.
•    The company has long term relations with marquee global clients.
•    Its plans for higher-margin speciality chemicals augur well.
•    Investment with a long term perspective may be considered.

ABOUT COMPANY:
Laxmi Organic Industries Ltd. (LOIL) is a leading manufacturer of Acetyl Intermediates (AI) and Specialty Intermediates (SI) with almost three decades of experience in the large scale manufacturing of chemicals. Since its inception in 1989, it has been on a journey of transformation. The company initially started manufacturing acetaldehyde and acetic acid in 1992, and soon thereafter moved on to manufacturing ethyl acetate in 1996. LOIL currently among the largest manufacturers of ethyl acetate in India with a market share of approximately 30% of the Indian ethyl acetate market (source: Frost & Sullivan Report). Further, post completion of the YCPL Acquisition, its market share in the ethyl acetate market will be further enhanced. In Fiscal 2010, it commenced manufacturing the Specialty Intermediates by acquiring Clariant's diketene business.

LOIL is the only manufacturer of diketene derivatives in India with a market share of approximately 55 % of the Indian diketene derivatives market in terms of revenue in Fiscal 2020 and one of the largest portfolios of diketene products (source: Frost & Sullivan Report). As of December 31, 2020, the aggregate installed production capacity at the AI Manufacturing Facility was 161,320 MTPA, while the aggregate installed production capacity at the SI Manufacturing Facility was 78,045 MTPA. The company has two manufacturing units and two distilleries and is in the process of establishing one more manufacturing unit.

It is well placed to enter into the high margin speciality fluorochemicals space through this acquisition. According to the Frost & Sullivan Report, given the expertise in the Acetyl Intermediates and the Specialty Intermediates segments, LOIL's entry into the fluorochemicals space will put it in a differentiated position from other chemicals manufacturers.

It has significantly expanded the scale of operations and global footprint with customers in over 30 countries including China, Netherlands, Russia, Singapore, United Arab Emirates, United Kingdom and United States of America. The company has established long-standing relationships with marquee players including Syngenta Asia Pacific Pte. Ltd., Alembic Pharmaceuticals Limited, Covestro (India) Private Limited, Dr. Reddy's Laboratories Limited, Flint Group India Private Limited, Granules India Limited, Hetero Labs Limited, Heubach Colour Private Limited, Hubergroup India Private Limited, Huhtamaki India Limited, Laurus Labs Limited, Macleods Pharmaceuticals Private Limited, Mylan Laboratories Limited, Neuland Laboratories Limited, Parikh Packaging Private Limited, Suven Pharmaceuticals Limited, Colourtex Industries Private Limited, and UPL Limited.

The company has its own marketing offices in key global markets and thus having an edge over other players. LOIL has been the largest exporter of ethyl acetate from India.

ISSUE DETAILS/CAPITAL STRUCTURE:
To part finance its plans for investment in its wholly-owned subsidiary (Rs. 98.14 cr.), Capex for expansion of SI manufacturing unit (Rs. 103.63 cr.), prepayment/repayment of certain borrowings (Rs. 179.31 cr.), working capital (Rs. 35.18 cr.) and general corpus fund needs, the company is coming out with a maiden IPO by way of fresh equity issue worth Rs. 300.00 cr. and an offer for sale (OFS) of Rs. 300 cr. thus taking the overall size of the issue to Rs. 600 cr. The issue is for approx 23076935 equity shares of Rs. 2 each for fresh issue as well as for OFS (at the upper cap of the price)  making the total issue of  46153870 shares. The company has fixed the price band of Rs. 129.00 - Rs. 130.00 per share. Minimum application is to be made for 115 shares and in multiples thereon, thereafter.

The company has reserved 50% for QIBs, 15% for HNIs and 35% for Retail investors. LOIL issued shares worth Rs. 300 cr. as pre-IPO placement in the month of February and March 2021. Hence the fresh offer size reduced from Rs. 500 cr. to Rs. 300 cr.

The issue constitutes 17.51% of the post issue paid-up equity capital of the company. The issue opens for subscription on March 15, 2021, and will close on March 17, 2021.

This issue is jointly lead managed by Axis Capital Ltd. and DAM Capital Advisors Ltd. (erstwhile known as IDFC Securities Ltd.). Link Intime India Pvt. Ltd. is the registrar of 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. 38.60 to Rs. 129.00 per share between October 2009 and March 2021 (on the basis of Rs. 2 face value). It has also issued bonus shares in the ratio of 4 for 1 in January 2019. The average cost of acquisition of shares by the promoters is Rs. Not ascertainable and Rs. 0.05 per share.

LOIL's current paid-up equity capital of Rs. 48.12 cr. will stand enhanced to Rs. 52.73 cr. post issue. With the higher price of the IPO, the company is looking for a market cap of Rs. 3427.62 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, LOIL has (on a consolidated basis) posted turnover/net profits of Rs. 1396.08 cr. / Rs. 75.70 cr. (FY18), Rs. 1574.32 cr. / Rs. 72.39 cr. (FY19) and Rs. 1538.62 cr. / Rs. 70.21 cr. (FY20). For the first six months of the current fiscal ended on September 30, 2020, it has earned a net profit of Rs. 45.48 cr. on a turnover of Rs. 814.36  cr. Higher provisioning for depreciation and amortization impacted its bottom lines for FY19 and FY20, clarified management.

For the last three fiscals, LOIL has posted an average EPS of Rs. 2.90 and an average RoNW of 16.94%. The issue is priced at a P/BV of 6.19 based on its NAV of Rs. 20.99 per share as of September 30, 2020, and at a P/BV of 3.52 based on post issue NAV of Rs. 36.88 per share(at the upper price band).

If we annualized FY21-H1 earnings and attribute it to fully diluted post issue equity, then the asking price is at a P/E of around 37.68 against an industry composite P/E of 21.70. The issue appears averagely priced.  

COMPARISON WITH LISTED PEERS:
As per offer documents, LOIL has shown Aarti Industries, Atul Ltd., Fine Organic, Navin Fluorine, Rossari Bio and SRF as its listed peers. They are currently trading at a P/Es of around 45.16, 33.01, 62.14, 29.22, 71.02 and 42.26 (As of March 10, 2021). However, they are not fully comparable on an apple to apple basis.  

DIVIDEND POLICY:
The company is a dividend-paying company and has paid a dividend of 15% (FY18), 3.5% (FY19) and 17.50% (FY20). It will follow prudent dividend policy post listing on the basis of its performance and future prospects.

MERCHANT BANKERS TRACK RECORDS:
The two Book Running Lead Managers (BRLMs) associated with the offer have handled 15 issues in the past three fiscals, out of which 7 issues closed below the issue price on the listing date.

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