Neogen Chemicals IPO review (May apply)

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Review By Dilip Davda on April 18, 2019

• NCL is a major player in bromine and lithium-based molecules.
• With recent capex and expansion, it is in fast forward mode.
• Client list includes Austin, CBC, Thermax, Voltas, Divi's Lab etc.
• Repayment of debt will result in financial cost savings.
• NCL is poised for bright prospects ahead.

ABOUT COMPANY:
Neogen Chemicals Ltd. (NCL) is one of India's leading manufacturers of bromine-based, and lithium-based, specialty chemicals. Specialty chemicals are those chemicals that impart different properties to a variety of products (i.e. the effect that specialty chemicals have varies based on the product) and have a high degree of value addition. Specialty chemicals are, also generally, in the Indian context, manufactured in smaller volumes when compared to non-specialty chemicals. Specialty chemicals, including bromine and lithium-based compounds, comprise pharmaceutical intermediates, agrochemical intermediates, engineering fluids, electronic chemicals, polymers additives, water treatment chemicals, construction chemicals and flavours and fragrances.

Specialty chemicals are widely used for specialised applications to meet industry-specific requirements and can be classified based on application industries. Additionally, certain specialty chemicals find application in multiple industries. NCL manufactures specialty organic bromine-based chemical compounds (Bromine Compounds) and other specialty organic chemical compounds as well as specialty inorganic lithium-based chemicals compounds (Lithium Compounds and together with the Bromine Compounds the Products). It presently manufactures an extensive range of specialty chemicals which find application across various industries in India and globally. As on February 28, 2019, it has manufactured an aggregate of 198 products comprising 181 organic chemicals and 17 inorganic chemicals.

NCL also manufactures niche products such as Grignard reagents. In addition to manufacturing standard products, it also undertakes custom synthesis and contract manufacturing. In custom synthesis, the product is developed and customized primarily for a specific customer, but process know-how and technical specifications are developed in-house. Recently, NCL also commenced contract manufacturing where the product is developed under confidentiality for a single customer using the process know-how and the technical specifications provided by the customer. Contract manufacturing has enabled it to increase the bouquet of product offering. The company differentiates itself in the contract manufacturing space by additionally offering process innovation, which, generally, reduces the overall operating costs for customers. NCL operates out of manufacturing facilities located in Mahape, Navi Mumbai in Maharashtra (Mahape Facility) and Karakhadi, Vadodara in Gujarat (Vadodara Facility).

Now NCL is in the process of developing a green-field manufacturing unit in Dahej SEZ, in Gujarat (Proposed Dahej Facility) and also proposing to expand operations in Karakhadi, Vadodara (Proposed Vadodara Facility). The company has own R & D center with full-fledged staff.

NCL's client list includes big global corporate like Austin, CBC, Solvay, Voltas, Thermax, Divi's Lab, Laurus Labs etc. It is enjoying established and stable relationships with suppliers as well as customers. The company has created a niche play in the segment that has entry barriers for newcomers.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance prepayment/repayment of all or portion of certain borrowings (Rs. 20.50 cr.), early redemption of 9.8% FRCPS (Rs. 11.50 cr.), working capital (Rs. 20 cr.) and general corpus fund needs, NCL is coming out with a maiden IPO of around 6155813 equity shares of Rs. 10 each. It comprises fresh equity issue worth Rs. 70 cr. (approx 3255813 shares) and offer for sale of 2900000 equity shares via book building route. The issue opens for subscription on 24.04.19 and will close on 26.04.19. NCL has fixed a price band of Rs. 212 – Rs.215 per share and mulls mobilizing Rs. 130.50 cr. to Rs. 132.35 cr. (based on lower and upper price bands). Minimum application is to be made for 65 shares and in multiples thereon, thereafter. Post allotment; shares will be listed on BSE and NSE. The issue is jointly lead managed by Inga Advisors Pvt. Ltd. and Batlivala & Karani Securities India Pvt. Ltd. Link Intime India Pvt. Ltd. is the registrar to the issue. Issue constitutes 26.4% of the post issue paid up capital of the company.

Having raised most of the equity at par, it has converted CCP at Rs. 193.86 per share in September 2018. It has also issued bonus shares in the ratio of 2 for 1 (September 1994), 4 for 5 (September 2012) and 3.444 shares for every 1 share held in March 2016. The average cost of acquisition of shares by the promoters is Rs. 1.14 and Rs. 1.18 per share. The average cost of acquisition of shares by one of the selling stakeholder is Rs. 1.67 per share.

Post issue NCL's current paid up equity capital of Rs. 20.08 cr. will stand enhanced to Rs. 23.34 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for last three fiscals, NCL has (on a consolidated basis) posted a turnover/net profits of Rs. 109.05 cr. Rs.5.18 cr. (FY16), Rs. 121.78 cr. / Rs. 7.68 cr. (FY17) and Rs. 164.68 cr. / Rs. 10.50 cr. (FY18). For the first nine months ended on 31.12.18 for FY19, it has earned a net profit of Rs. 12.22 cr. on a turnover of Rs.159.69 Cr. It's PAT margins have increased from 4.8% in FY16 to 7.7% in 9MFY19. For all these years NCL has posted CAGR of 23% in gross sales.

For the last three fiscals, NCL has posted an average EPS of Rs. 4.34 and an average RoNW of 19.72%. Issue is priced at a P/BV of 7.02 based on its NAV of Rs. 30.62 (as on 31.12.18). If we annualize latest earnings (indicating improved trends) and attribute it on fully diluted equity post issue then asking price is at a P/E of around 31 (It stands around 41 against sector's average P/E of around 37 (as on 31.03.18).

As on 31.12.18, NCL has a net worth of Rs. 61.5 cr. against which it has a debt of 114.6 cr. Since the company is reducing a portion of the debt, it will save finance cost going forward.

COMPARISION WITH LISTED PEERS:
As per offer documents, it has shown Aarti Ind., Atul Ind., Navin Fluorine, Paushak Ltd. and Vinati Organics as its listed peers that are currently trading at a P/Es of around 33, 25, 23, 23 and 36 (as on 18.04.19). However, all of them are strictly not comparable on an apple to apple basis.

MERCHANT BANKER'S PERFORMANCE:
This is the first mandate from Inga Advisers Pvt. Ltd., while Batlivala & Karani has not handled any IPO in last three fiscals. Thus both the BRLMs have no recent track records.

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