The IPO mania continues on Dalal Street, as four public issues open for subscription this week. Chemplast Sanmar has launched its three-day initial public offering (IPO) today— August 10. It will be the fifth specialty chemical manufacturer to go public this year! In this article, we explore what the company does and learn more about its IPO.

Company Profile – Chemplast Sanmar Ltd

Chemplast Sanmar Ltd (CSL) is a leading manufacturer of specialty chemicals based in Chennai. Established in 1985, the company produces specialty paste PVC resin, starting materials, and intermediates. Their products are extensively used in the agrochemical, pharmaceutical, and fine chemicals sectors. CSL also produces chemicals such as caustic soda, hydrogen peroxide, refrigerant gas, and industrial salts.

CSL is the largest manufacturer of specialty paste polyvinyl chloride (PVC) resins in India on the basis of installed production capacity (as of December 2020). The product has multiple end-use applications such as making hand gloves, conveyor belts, artificial leather, flooring tiles, etc. The company is also the largest manufacturer of hydrogen peroxide and the third-largest manufacturer of caustic soda in South India. Recently, CSL acquired a 100% equity stake in Chemplast Cuddalore Vinyls Ltd (CCVL)— the second largest manufacturer of suspension PVC resin in India.

They operate three manufacturing facilities situated at Mettur, Berigai, and Cuddalore in Tamil Nadu and one unit at Karaikal in Puducherry. Chemplast Sanmar is part of Sanmar Holdings Ltd (SHL), one of the oldest and most prominent corporate groups in South India. Fairfax India Holdings Corp, led by Indian-Canadian billionaire businessman Prem Watsa, holds a 43% stake in SHL Chemicals Group. CSL has a strong management team with extensive experience in the chemicals industry.

About the IPO

Chemplast Sanmar aims to raise Rs 3,850 crore through its initial public offering (IPO). The public issue opens on August 10 and closes on August 12. The price band for the IPO has been fixed at Rs 530-541 per share. 

The fresh issue of shares (of the face value of Rs 5 each) aggregates to Rs 1,300 crore. The IPO also consists of an offer for sale (OFS) by existing promoters that aggregates to Rs 2,550 crore. Individual investors can bid for a minimum of 27 equity shares (1 lot) and in multiples of 27 shares thereafter. You will need a minimum of Rs 14,607 (at the cut-off price) to apply for this IPO. The maximum number of shares that can be applied by a retail investor is 351 equity shares (13 lots). 

Chemplast Sanmar will utilise the net proceeds from the IPO for two main purposes:

  1. Early redemption of non-convertible debentures (NCDs) of up to Rs 1,238.3 crore. The company had issued NCDs aggregating to Rs 1,270 crore of seven-year tenure and an interest rate of 17.5% per annum.
  2. To meet the required funds for general corporate purposes.

The total promoter holding in the company will decline sharply from 100% to 54.99% post the IPO.

Financial Performance

CSL’s revenue increased substantially by 201% YoY to Rs 3,815 crore in FY21. The significant jump in revenue and net profit in FY21 is mainly on account of the acquisition of Chemplast Cuddalore Vinyls Ltd (CCVL) to improve its product offering. That is, CCVL’s financial results have been included in the consolidated figures. At the same time, the acquisition resulted in a sharp increase in its overall debt.

CSL posted a negative net worth of Rs -(1,865.6) crore in the previous financial year (FY21). [A company’s net worth or book value is the value of its assets after paying off its liabilities] The company recognized certain losses due to the acquisition of CCVL’s business worth Rs 3,313 crore in FY21. Chemplast Sanmar’s gross debt rose 62% YoY to Rs 2,110 crore in FY21. This is a major red flag.

Looking at the positives, EBITDA margin has been strong in the range of 25-26% and cash flow generation has been healthy over the past three years.

Risk Factors

  • Chemplast Sanmar has incurred significant indebtedness. Its total outstanding borrowings stood at Rs 2,016.9 crore as of March 31, 2021. The company’s lenders have imposed certain restrictive conditions under its financial agreements. This could limit CSL’s ability to pursue its business and restrict the firm from planning or reacting to changes/trends in the industry.
  • The company’s intellectual property (IP) rights may not be adequately protected against third-party infringement.
  • The uncertainty surrounding the Covid-19 pandemic poses a threat to Chemplast Sanmar’s business operations and financial conditions. 
  • CSL faces foreign exchange fluctuation risks, which could adversely affect its financial results and cash flows.
  • The non-availability of credit ratings or a poor credit rating could restrict the company’s access to capital.
  • There are outstanding legal and regulatory proceedings involving CSL, CCVL, and its directors.
  • The sale of specialty paste PVC resin contributes nearly 58% to the company’s total revenue. A decline in the demand for this product could severely impact CSL’s overall performance.

IPO Details in a Nutshell

The book-running lead managers to the public issue are ICICI Securities, Axis Capital, Credit Suisse Securities, IIFL Securities, Ambit Pvt Ltd, BOB Capital Markets, HDFC Bank, and IndusInd Bank. Chemplast Sanmar Ltd had filed the Red Herring Prospectus (RHP) for its IPO on August 2, 2021. You can read it here.

Interestingly, CSL is returning to the stock exchanges after a gap of nine years. It was voluntarily delisted in May 2012 when it bought back shares of the face value of Rs 1 each from investors at Rs 15 per share. Its market cap was Rs 1,190 crore at the time of delisting in 2012. Now, the company is re-listing at a market cap of ~Rs 8,554 crore! It also seems like CSL’s promoters are selling a significant stake, which is not an encouraging sign for new investors.  

Conclusion

India is the fastest-growing market for specialty chemicals in the world. According to a report from India Brand Equity Foundation (IBEF), the Indian specialty chemicals industry is expected to grow at a CAGR of 11-12% over the next five years. It is expected to become a ~Rs 3 lakh crore market by 2025. Due to its diversified portfolio, Chemplast Sanmar is well-positioned to capture favourable industry trends. They have announced plans to expand manufacturing capabilities to cater to increasing demand for their products.

However, investors must be cautious about CSL’s high debt burden and negative net worth. The company has pledged its entire stake in CCVL (a vital subsidiary) in favour of Housing Development Finance Corp (HDFC). The company aims to pay off its debenture holders and reduce overall debt through the IPO proceeds.

CSL will be directly competing with leading chemical manufacturers such as PI Industries, SRF Limited, Finolex Industries, Navin Fluorine, and many more. They will be the fifth specialty chemical manufacturer to go public in 2021. As we can see, the industry is extremely competitive. Do consider the risks associated with CSL and come to your own conclusion.

What are your opinions on this IPO? Will you be applying for it? Let us know in the comments section of the marketfeed app.

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