Chemcon Specialty Chemicals Ltd. - Is it worth applying?

Recently, market witnessed whopping listing gains of around 58% from a speciality chemicals company and the last closing price as on today is Rs.775 per share. Any guesses?

Right! We are talking about recently listed Rossari Biotech which was issued at Rs. 425 and listed at Rs. 670. But why are we talking about it again? Are we talking about something similar? Yes, another speciality chemicals company is ready to get listed on market. Could it be another rossari biotech? For that let’s move to what I analyzed out of their red herring prospectus…………..

Chemcon Speciality Chemicals Ltd.

Incorporated in 1988, Chemcon Speciality Chemicals Ltd is a manufacturer of specialized chemical products i.e. HMDS and CMIC. Its product portfolio includes oilfield chemicals (Calcium Bromide, Sodium Bromide, and Zinc Bromide), Pharma intermediates, Silanes, and chemicals contract manufacturing work. Chemcon Chemicals is a leading manufacturer of Pharmaceutical chemicals and generates maximum revenue from this particular segment. Company not only serves the domestic market but also export its products in overseas market such as USA, China, Japan, UAE, Serbia, Russia, Malaysia, and Azerbaijan. It has a manufacturing plant at Manjusar near Vadodara in Gujarat, 5 operational plants, 3 warehouses, and 2 leased warehouses.

They were the largest manufacturer of CMIC in India and the second largest manufacturer of CMIC worldwide, in terms of production and capacity in calendar year 2019. Further, we were the only manufacturer of Zinc Bromide and the largest manufacturer of Calcium Bromide in India, in terms of production in calendar year 2019.

Key Customers

Hetero Labs Limited, Laurus Labs Ltd, Aurobindo Pharma Ltd, Lantech Pharmaceuticals Ltd, Macleods Pharma Ltd are the key customers of its Pharma chemical business. And Shree Radha Overseas, Universal Drilling Fluids, Water Systems Speciality are some of the clients of its oilfield chemicals segment.

Products

As I don’t want to make this very complex for you so we will be just looking at the end uses of these products.

·       Oilfield Chemicals – Basically used in completion of well & to form excellent drilling.

i)      Calcium Bromide

ii)     Sodium Bromide

iii)   Zinc Bromide

·       Pharmaceutical Chemicals

i)      HDMS

A) Antibiotic Drugs – used in treatment of covid-19

B) Anti-viral Drugs – used to treat tuberculosis & various other infections

C) Electronical Chips used inside computers, phones & tablets.

D) Rubber Industry – to improve tearing strength

ii)     CMIC – used to treat HIV & HBV

·       Silanes - used in some fiberglass and composites to improve strength. Paints, inks and coatings often use silanes

·       Contract Manufacturing - offer chemical custom manufacturing services & can take project from early phase development to scale-up and commercial manufacture from Kg to Metric tons.

Industry Analysis

• The global market of chemicals used as pharma intermediates was valued at about USD 27 Bn in 2019 and is expected to grow at a CAGR of 4% between 2020 and 2023.
• The global clear brine fluids market was valued at about USD 860 Mn in 2019 and is anticipated to grow at a CAGR of slightly above 5% between 2020 and 2023.
• CRISIL Research estimates that domestic consumption of chemicals used as pharma intermediates remained at INR ~322 Bn (~USD 4.9 Bn) in fiscal 2019, growing at ~7% CAGR since fiscal 2013.

Strengths

• Leading manufacturer globally of the Pharmaceutical Chemicals and leading manufacturer in India of the Oilwell Completion Chemicals.

India currently is a net importer of HDMS (approx..40% of it’s domestic demand) catered by China & Germany & is expecting a growth in demand at 10.6% CAGR between 2019-2023. Additionally, other countries of the world are dependent on China for their HMDS requirement, however with changing environment regulations, the trade from the country is low, giving opportunity to Chemcon to target China’s export customer base.

India and China are the only countries that produce CMIC. Chemcon’s share in CMIC manufacturing capacity has increased from 7.07(in 2014) to 26.16% (in 2019). India is a net importer of CMIC, with about 62% of India’s domestic demand in 2019, catered by China. The demand for CMIC is expected to grow at 11% CAGR from 2019 to 2023. Company is well positioned to substitute the imports from China and hence, has an opportunity to grow at a CAGR of more than 25%.

Only manufacture of Zinc Bromide and the largest manufacturer of Calcium Bromide in India, in terms of production in calendar year 2019. Further, while we commenced the sales of our Oilwell Completion Chemicals in calendar year 2014, our share in the global production of the Oilwell Completion Chemicals has grown to 2.65% in calendar year 2019

• Diversified customer base coupled with long standing relationships

Chemcon supply their products to customers in India and also export products to countries including United States of America, Germany, Italy, South Korea, People’s Republic of China, Japan, United Arab Emirates, Serbia, Russia, Spain, Thailand and Malaysia. In Fiscals 2020, 2019 and 2018, our exports (including Deemed Exports) contributed 39.78%, 31.99% and 47.84% respectively of their total revenue from operations. Revenue from exports (including Deemed Exports) have grown at a CAGR of 17.57% between Fiscals 2018 and 2020. Company’s top five customers and top ten customers contributed 59.35% and 72.26%, respectively of their total revenue from operations in Fiscal 2020, as compared to 45.94% and 67.56%, respectively of their total revenue from operations in Fiscal 2019 and 60.01% and 75.67%, respectively of their total revenue from operations in Fiscal 2018.

• The specialty chemicals industry in which company operates has high entry barriers.

The specialty chemicals industry in which company operates has high entry barriers due to the involvement of complex chemistry in the manufacture of products, which is difficult to commercialize on a large scale. Moreover, some of the raw materials that we company such as bromine, MCF and TMCS are highly corrosive and toxic chemicals. Therefore, handling these chemicals requires a high degree of technical skill and expertise, and operations involving such hazardous chemicals & that the level of technical skill and expertise that is essential for handling such chemicals can only be achieved over a period of time, creating a further barrier for new entrants.

• Consistent financial performance with a strong financial position

From above screenshot we can deduce, company’s revenue is growing but saw a hit in 2020 as compared to 2019. Whereas, EBITDA & Profit after tax was constantly growing. You might be wondering with almost 14% how is it possible that the profit is still greater than previous year. The company went on reducing employee benefit expenses and due to low sales, a reduction in manufacturing expenses was seen. Earning per share is increasing year on year basis while the return on capital employed is decreasing. Return on equity stands at 34.23% although it’s quite impressive but a constant decrease can be seen.

Objectives of the issue

• To meet capital expenditures for expansion of manufacturing facility.
• To meet business working capital requirements.
• To meet general corporate purposes.

Peers Analysis

Comparing it with peers, company is able to generate maximum return on net worth i.e. 34.23%. PE of the company (as per cut off price) stands out to be 22.12 which is below the industry average and it can be said that the company is undervalued.

Grey Market Views

Grey market premium of Chemcon stood at Rs. 250-255 per share which means we can expect a bumper listing.

IPO Details

Important Dates

Most of you can apply into Retail Individual Investor (RII) category. The retail investors are showing impressive interest and overall IPO has been oversubscribed 5.19 times on 1st day which means market is pretty attracted towards this IPO.

Conclusion

Based on my analysis, I would recommend a buy for this IPO. I, myself has applied for the same as the company looks pretty strong on financials. In terms of industry forecasts, this company can definitely be a substitute to china. Talking about the bid price, you should always apply at the cut off price.

Hope I was able to provide you with some insights and will help you in making decision about same. Would love to hear your feedback on the same!