Chemcon Speciality Chemicals IPO Sees Robust Demand; Should You Also Subscribe?

The initial public offering (IPO) of Chemcon Speciality Chemicals received a strong response on the first day of bidding which was subscribed more than 5 times on Monday, despite a dramatic fall in the secondary stock market. Data from NSE and BSE show that the issue received applications for 3.38 crore shares against the offer of 65.59 lakh shares, implying 5.15 times subscription.

The retail quota received subscription of 9.86 times on the opening day.

The Vadodara-based manufacturer of speciality chemicals plans to raise Rs 318 crore from the issue with a price band of Rs 338-340 per equity share. The IPO closes on 23 September.

The issue consists of a fresh issue of Rs 165 crore and an offer for sale of 45 lakh equity shares by promoters Kamalkumar Rajendra Aggarwal and Naresh Vijaykumar Goyal, lower promoters' stake in the company from 100 percent to 74.5 percent, after the IPO sails through. Proceeds from the IPO will be used to meet the working capital requirement, CAPEX towards the expansion of the manufacturing facility and general corporate purposes.

About the company

Incorporated in 1988, the company manufactures specialised chemicals, such as Hexamethyldisilazane/Hexamethyldisilane(HMDS)and Chloromethyl Isopropyl Carbonate (CMIC) which are predominantly used in the pharmaceuticals industry. It is the only manufacturer of HMDS in India and 3rd largest manufacturer of HMDS worldwide.

Some of its known customers in India include Hetero Labs, Laurus Labs, and Aurobindo Pharma. It also exports to USA, Italy, South Korea, Germany, China, Japan, UAE, Serbia, Russia, Spain, Thailand and Malaysia, with exports making for 40 percent of its revenue from operations.

Most brokerages have recommended "subscribe" to the IPO

Geojit Financial Services said that at the upper price band of Rs 340, the company is available at P/E of 25.5x on FY20, which is attractive when compared to peers. Its peers Aarti Industries, Vinati Organics, Atul and Paushak are available at P/E of 36.9x, 41.5x, 30.8x and 41.5x respectively. Further, the brokerage believes that healthy business performance, regular capacity expansions, strong customer base, expanding margin profile and improving outlook for the sector are all good reasons to subscribe to the issue.

Motilal Oswal likes Chemcon Speciality Chemicals for its leadership position in niche products, high entry barriers and healthy financials. Further considering the bright prospects for Chemical companies due to the shift of supply chain away from China, it believes Chemcon would be well placed to capture this with its planned CAPEX.

The company's return ratios and margins are better than most of its peers, said Angel Broking and suggested that the company is undervalued compared with its peers and "a lot of value is left on the table."

"As we are positive on the future outlook for the industry as well as the company, we would recommend to 'subscribe' rating issue for long term as well as for listing gains," it said.

Risks

Motilal Oswal said high client concentration, limited product portfolio and criminal proceeding against a member of the promoter group are key risks for the stock. Chemcon derived 59 percent/72percent of its revenue in the financial year 2019-20 from its top 5/top 10 clients. Thus, the loss of even one client can adversely impact its financials.

Choice Broking has a "Subscribe with Caution" rating on the IPO. The brokerage said that while the company's fundamentals look positive, but the promoter and promoter group's corporate governance issue is making it cautious. The management has indicated that the company will not be impacted by any means if the outcome of the appeal is not favourable.

Naresh Vijaykumar Goyal is the promoter group member who has filed an appeal in relation to a criminal proceeding filed against him, which may have a negative effect on the stock in the future.