Chemcon Speciality Chemicals Ltd - Issue Opens Monday, September 21, 2020 Wednesday, September 23, 2020
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Chemcon Speciality Chemicals Ltd
Issue Opens Monday, September 21, 2020
Issue Closes Wednesday, September 23, 2020
Price Band 338/340
Bid Lot 44 shares and multiples thereafter
IPO UPDATE
Chemcon Speciality Chemicals Limited
Industry: SNAPSHOT
Active pharmaceutical ingredient (API) are made of certain chemical Issue Opens Monday, Sept 21, 2020
compounds i.e., Pharmaceutical intermediates which are the building blocks
of APIs. In 2019, the global market of chemicals used as pharma Issue Closes Wednesday, Sept 23, 2020
intermediates was approximately USD 27bn and anticipated to grow at a Price Band (Rs) 338 / 340
CAGR of 4% between 2020 and 2023. Some of the major factors to drive the
44 shares and multiples
requirement of pharma drugs is the increased weight of diseases, elderly Bid Lot
population and patent expiration. Thus, the production of APIs will enhance
Face Value Rs10
the demand of chemicals used as pharma intermediates. North America is
the biggest and most attractive market followed by Europe, whereas, Asia Listing BSE & NSE
Pacific is expected to be the fastest growing market of chemicals used as
pharma intermediates. Type of Issue Fresh Issue and Offer for Sale
Fresh Issue 1,650
Exhibit 1: Pharmaceutical Value Chain
Offer Size (Rs Mn) OFS 1,530
Total 3,180
*Implied Market Cap
12,454
(Rs Mn)
P/E (based on FY20 Earnings)* 25.5
Source: RHP Chemcon Specialty Chemicals Ltd *Note: Implied Market Cap & P/E are calculated at upper price
band of Rs340
India Market Overview:
Consumption of chemicals used as pharma intermediates is dependent upon
Issue Allocation
bulk drugs manufacturing where most of the players are forward integrated
and a handful of large players are backward integrated. Many of these Reservations % of Net Issue
players have their footprints in specialty chemicals, which are supplied to the
QIB 50
pharma sector along with other sectors. In FY19, Crisil estimated domestic
consumption of chemicals used as pharma intermediates at USD4.9bn NIB 15
growing at ~7% CAGR while at the same time bulk drugs production Retail 35
(including exports) also grew at a CAGR of ~7%. The share of imports in
domestic consumption has been dropping since 2013; approximately 63% in Total 100
2013 to 58% in 2019 due to patents expiry, withdrawal of customs duty
exemption on drugs & intermediates and decline in exports from China in
the past 2-3 years. Exports from India (in value terms) grew at nearly 10.1% Object of the Offer
CAGR between fiscals 2013 and 2019. There are immense opportunities for
growth of domestic manufacturers due to a number of factors like GOI Capital expenditure towards expansion of
initiatives for creation of bulk drugs parks for the pharma industry, programs manufacturing facility (project)
like Jan Aushadhi Scheme and shut down of chinese chemical plants. To meet the working capital requirements
General corporate purposes
Exhibit 2: India Overall Chemicals Market (used as pharma intermediates)
Details of Offered Shares
Offer for Sale 4,500,000
Fresh Issue 4,852,941
Total 9,352,941
Source: RHP Chemcon Specialty Chemicals Ltd
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IPO UPDATE
Chemcon Speciality Chemicals Limited
Industry: (contd.) Exhibit 3: Bromide Global Key Manufacturers Production Market Share, 2019
There have been some increased oil & gas exploration
activities around the world which leads to increased
demand of water-based fluids, Oil based fluids and clear
brine fluids. In the segment of clear brine fluids, bromides
are popular, where sodium bromide liquid and zinc
bromide liquid are used on a large scale. Clear brine fluids
which was valued at about USD860mn in 2019 and is
predicted to grow at a CAGR of 5% between 2020 and
2023; however, the impact of COVID-19 has also been
experienced in the Oil & Gas production, which is bound
to restart in a phased manner.
Source: RHP Chemcon Specialty Chemicals Ltd
CMIC (chloromethyl isopropyl carbonate) is used as a key Exhibit 4: CMIC Global Key Manufacturers Production Market Share, 2019
intermediate for anti-AIDS and anti-hepatitis B drug
Tenofovir in the pharma industry. During the pandemic
situation, the consumption of Anti-viral medicines had
grown which favoured the raw material producers of CMIC
and other chemicals used in manufacturing of
antiviral drugs. India and China are the only countries that
produce CMIC; in 2019, India accounted for 36% while
China accounted for 64% of the global production.
Increase in demand for CMIC demand will improve the
utilization rate of existing capacities and lead to capacity
expansions. There is immense opportunity for players like
Chemcon and Chinese players like Shanghai Twisun to
expand their existing capacity by 2021.
Source: RHP Chemcon Specialty Chemicals Ltd
HMDS (hexamethyldisilazane) is used in manufacturing of Exhibit 5: HMDS Global Key Manufacturers Production Market Share, 2019
antibiotics such as penicillin, cephalosporins and other
types of penicillin derivatives. During the pandemic, a good
growth rate was indicated for HMDS. HMDS also finds
application in semiconductor processing, as a
precursor to many bases common in organic synthesis and
organometallic chemistry, photolithography, electron
microscopy and pyrolysis gas chromatography mass
spectrometry etc. China accounts for the largest
production share of HMDS followed by North America and
then Europe. Currently, India is a net importer of HMDS
where about 40% of the demand is catered by imports
from China (97%) and Germany (3%). Thus, by substituting
imports and catering to India’s growing demand market,
Chemcon has immense opportunity in India. Source: RHP Chemcon Specialty Chemicals Ltd
About the Company: Chemcon Speciality Chemicals Ltd (CSCL) is one of the leading manufacturers of specialized chemicals like
HMDS and CMIC which have many applications in the pharma industry and in the domain of inorganic compound chemistries
related to bromides, i.e. calcium bromide, zinc bromide and sodium bromide, which further find applications as completion
fluids in the oilfields industry. In India, CSCL is the only manufacturer of HMDS and is the third largest manufacturer of HMDS
worldwide (in terms of production FY2019) while at the same time the company is the largest manufacturer of CMIC in India and
the second largest manufacturer of CMIC worldwide (in terms of production and capacity in FY2019). In addition to this, the
company is the only manufacturer of Zinc Bromide and the largest manufacturer of Calcium Bromide in India (in terms of
production in FY2019). Pharma segment contributes to nearly 63.75% of the total revenues, while Oilwell Completion Chemicals
segment contributes nearly 33.47%.
Please Turn Over Page No 2
IPO UPDATE
Chemcon Speciality Chemicals Limited
About the Company: (contd.) Exhibit 6: Product Profile
The manufacturing facility of the company is located at
Manjusar near Vadodara in Gujarat. Within the
manufacturing facility, CSCL has seven operational plants;
two of which are dedicated to the manufacturing of HMDS
and ancillary products, on multipurpose plant currently used
for manufacturing of HMDS and other pharma chemicals,
two plants dedicated to the manufacturing of CMIC and two
plants devoted to the manufacturing of oil well completion
chemicals. Key customers for pharma chemicals segment
include Hetero Labs Ltd, Laurus Labs Ltd, Aurobindo Pharma
Ltd, Sanjay Chemicals (India) Pvt Ltd, Ind -Swift Laboratories
Ltd, Vivin Drugs & Pharmaceuticals Ltd, Macleods Pharma
Ltd etc. Key customers for oil well completion chemicals
segment include Shree Radha Overseas, Water Systems
Specialty Chemical DMCC, CC Gran Limited Liability Source: RHP Chemcon Specialty Chemicals Ltd
Company etc. The company’s revenues from exports (including deemed exports) has grown at a CAGR of 17.57%
between FY2018 and FY2020. Revenue from exports in FY2020, FY2019 and FY2018 came in at 39.78%, 31.99% and 47.84%,
respectively.
Key Triggers:
(i) Leading Manufacturer: The company is a leading manufacturer of some of the critical chemicals used in Pharma and the oil
well completion processes. CSCL is the only manufacturer of HMDS in India and is also the third largest manufacturer of HMDS
worldwide. In addition to this, the company is the largest manufacturer of CMIC in India and the second largest
manufacturer of CMIC globally (in terms of production and capacity in calendar year 2019). India is a net importer HMDS and
sees demand growth which serves as an opportunity for growth for exports. India and China are the only countries that produce
CMIC, while both are producers and consumers of the product seeing huge traction in demand growth. Besides this, CSCL is the
only manufacture of Zinc Bromide and the largest manufacturer of Calcium Bromide in India (in terms of production in FY2019).
(ii) Strong and Diverse Customer Base: CSCL supplies its products to customers in India and abroad. The export market includes
countries like USA, Germany, Italy, South Korea, China, Japan, UAE, Serbia, Russia, Spain, Thailand, Malaysia etc.
Revenue from exports in FY2020, FY2019 and FY2018 came in at 39.78%, 31.99% and 47.84%, respectively. The company has
good relationships with some of the key customers, for e.g. Aurobindo Pharma has been a client for over 20 years. As per the
RHP, the company generates nearly 68.6% of the total revenue from customers who are regular purchasers of products over the
last five years and top seven customers (for FY2020) have been their customers for over four years.
(iii) Specialty Chemicals with High Entry Barriers: The specialty chemicals industry in which CSCL is involved has a number of
high barriers to entry. The manufacturing of these products involves of complex chemistry which is difficult to
commercialize on a large scale and a long gestation period to be enlisted as a supplier to customers in the domain of pharma
chemicals. Some of the raw materials like bromine, MCF and TMCS are highly corrosive and toxic chemicals which require a high
degree of technical skill and expertise. Operations involving such hazardous chemicals require well trained manpower to handle
the same.
(iv) Expanding Production Capacity: With some part of the proceeds of the IPO (Rs410mn), the company intends to expand its
manufacturing operations and production capacity. At present the company has seven operational individual plants with a total
volumetric reactor capacity (as on July 31, 2020) of 374.85 KL. CSCL intends to build two additional plants with a total volumetric
reactor capacity of 251.00 KL. The additional plants/ capacity will be focusing on pharma segment. Once the
expansion plans are completed, the total volumetric reactor capacity will be enhanced to 625.85 KL and will enable the company
to reap the benefits from economies of scale.
(v) Robust Upcoming Demand: Currently India is a net importer of HMDS where 40% of India’s domestic demand is met by
imports from China and Germany. India anticipates to witness a demand growth with a CAGR of 10.6% (from 2019 and 2023).
India and China are the only countries that produce CMIC. India is also a net importer of CMIC, where nearly 62% of India’s
current domestic demand are catered via imports from China. The trade clash between the USA and China can influence China’s
exports of HMDS to USA and can indirectly benefit India’s exports. As per RHP, the company has already started the supply of
HMDS to some of the customers in the USA.
Please Turn Over Page No 3
IPO UPDATE
Chemcon Speciality Chemicals Limited
Risks & Concerns:
Limited product portfolio of products to be offered
Significant portion of the revenue is derived from a few customers
Shortfall or an increase in the raw material costs can adversely affect the pricing and supply of products
Some of the raw materials used are highly corrosive and flammable requiring expert handling and storage
Profitability largely depends on the global prices of the products
Oilwell completion chemicals is a segment which is highly dependent on the demand from the market
Naresh Vijaykumar Goyal, (member of Promoter Group) has filed an appeal in relation to a criminal proceeding against him
Promoter Group have filed an application for settlement with SEBI with respect to certain past non compliances with respect to
their holding in a listed company.
Financials:
CSCL has a track record of robust operations of over two decades and has a Exhibit 7: Financials
strong balance sheet, increasing net worth and stable cash flows. CSCL has
Revenues (Rs mn) FY18 FY19 FY20
been showing robust growth since the last 3 years or so. The company has
shown a revenue and PAT growth of CAGR of 29% and 36% over FY18-20. The Sales 1,572 3,033 2,621
strong business performance has also helped the company maintain a low
debt profile. As on March 31, 2020, the total borrowing stood at Rs445mn, EBITDA 451 661 703
with a debt to equity ratio was 0.31 and interest coverage ratio of 14.01. EBITDA Margin % 28.7 21.8 26.8
When compared to some of players which are its nearest peers in different
domains (there is no apple to apple comparison), the company has slightly Net profit After Tax 264 430 489
higher RoE of approximately 40%, high EV/Ebitda of 18.4 and has a low PE of
25.5. The Management intends to maintain this growth via regular capacity Net Profit Margin % 16.8 14.2 18.6
augmentation, diversification of the customer base and optimizing costs Earning Per Share 8.3 13.5 15.4
related to sourcing raw materials and other fixed costs. The addition of new
products in process (of commencing the commercial production of 2,5 DHT) RoNW (%) 49.2 44.9 34.2
will also boost the top line. The company is a strong contender to act as a
substitute to imports from China and has many opportunities to expand and Source: RHP Chemcon Specialty Chemicals Ltd
grow.
Outlook and Valuations:
The company is a leading manufacturer and market leader for the products they manufacture in the domains they serve
propelled by a strong and experienced management team which intends to grow in the existing markets and also enter newer
segments and geographies. At the upper price band of Rs340, CSCL is available at P/E of 25.5x on FY20, which is slightly
attractive when compared to peers. The CSCL intends to utilize the net proceeds from the fresh issue for capital expenditure,
expansion of its manufacturing facility, funds its working capital requirements and other general corporate purposes. In the past
CSCL has had a healthy business performance in a sector which shows an improving outlook; the company has been adding
capacities gradually while focusing on its strong customer base and expanding margin profile; the company has ample of free
land available at its current property for further expansion; all these factors indicate for a good growth of the company in near
and distant future, thus been cautiously bullish (keeping in mind the corporate governance issue of the promoter group to which
the Management has indicated shall not impact the company) on the company, we recommend a subscribe rating to this IPO.
Page No 4
IPO UPDATE
Chemcon Speciality Chemicals Limited
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