Chemplast Sanmar IPO - Should you apply?

2021 is definitely an amazing year for the primary market. Did you know that in the first six months Indian companies raised Rs 27,417 crore through IPOs? This is the highest in over a decade. The eager investors are definitely a reason for this. However, venture capitalists and existing shareholders are using this as their exit gate. Irrespective of the purpose, it is a win-win situation.

A few companies are lined up to release their IPOs this week. Today's article will provide you with the deets of one such company from the chemical industry!

Chemplast Sanmar Ltd - Company Overview

Chemplast Sanmar, a part of the SHL Chemicals Group is a fifty-year-old organization focused on manufacturing specialty chemicals like specialty paste PVC resin, and custom-manufactured chemicals for various sectors like the pharmaceutical, agro-chemical, and fine chemicals. It is also engaged in manufacturing other chemicals like chlorochemicals, caustic soda, hydrogen peroxide, etc. The company is India’s largest manufacturer of specialty paste PVC resin in terms of installed production capacity.

Financials of Chemplast Sanmar

Few key figures pertaining to the company’s restated consolidated financial statements are listed for your convenience.

The company saw a continuous increase in the total assets over the past three years. One interesting thing to notice is the substantial increase in revenue from operations and PAT in March 2021.  Well, the credit goes to the acquisition of CCVL on March 31, 2021, which has helped the company to strengthen its operations and its financial performance.

The major revenue of the company is generated from the production and sale of specialty paste PVC resin. For the nine months ended 31st December 2020, the most proportion of the product was sold in the northern region and the least in the eastern region.

Details of the IPO

The IPO is a book-built issue for an amount of Rs.38,500 million in the form of a fresh issue and an offer for sale. Promoter group to sell off shares worth Rs.865.60 million and shareholders, Rs.24,634.40 million. The lead managers of this issue include IIFL Securities, Yes Securities, ICICI Securities, Axis Capital, and a few others.

Other important details of the issue are:

Purpose of the IPO

• The main purpose of raising funds is to redeem the non-convertible debentures in full before they mature. From the funds raised through the fresh issue, an amount of Rs.12,832.5 million is to be allocated for the redemption.

• The balance is to be utilized for general corporate purposes.

Reasons to invest

Few points of strength that are sufficient enough to convince you to invest in this issue:

• The increasing demand for specialty paste PVC resin not met by the supply is a huge advantage to the company. The demand for the product is expected to grow at a CAGR of 6% - 8% between FY 2022 and FY 2025.

• The company also emphasizes the sustainability factor. It has a “zero” liquid discharge which ensures that the pollutants from the facilities are not discharged into land or water bodies.

• The company has captured the leadership position in an industry with huge entry barriers. It would require a huge investment of equipment, time, and extensive research for any other company to compete at the level at which Chemplast operates.

• The business model is vertical integration which provides advantages like incremental revenues, sustainable development, flexible planning for manufacturing, etc.

• The company intends to invest an additional Rs. 2,560 million by the year 2024 to enhance its manufacturing capacity and achieve operational excellence.

Reasons to avoid

The company is also exposed to a few factors of risk that definitely cannot be ignored:

• Like most other industries, the pandemic adversely affected the operational efficiency of this company. The manufacturing processes were disrupted and additional costs were incurred in order to retain employees and ensure their safety.

• All the manufacturing facilities of this company are situated in the state of Tamil Nadu and the Union Territory of Pondicherry. This can prove to be disadvantageous as any extreme political policies or social changes can impact the overall business.

• Also, a major proportion of the revenue is generated from the sale of specialty paste PVC resin. Unfavorable factors like regulatory action, pricing pressure, competitors’ threats, etc, could lead to a significant decline in revenue.

• The company is highly capital intensive. The operational efficiency depends upon factors like the productivity of the machinery and equipment, its optimum utilization, and also the workforce’s efficiency to manage the installed equipment.

• The company procures its raw materials from limited suppliers situated in and outside India. There are no long-term contracts in place which exposes the company to price fluctuations. Having a limited number of suppliers is a risk factor for this company. 

Final words

The company, like any other, has its fair share of pros and cons. However, one factor to consider is that the auditor's report of the SGIL states that there are significant indicators that hint at the group’s inability to continue operations if massive and immediate improvements aren't made.

Anyways, fundamentals are not paid much attention to, in the present era of stock market trading. Especially, in the case of IPO trading, the herd mentality is what supersedes rational analysis. We would suggest you learn your basics and apply them rationally while investing.

However, it's purely your call to make if you'd want to invest in this IPO or let it pass! And what’s it going to be?