Vadodara-based Chemcon Speciality Chemicals is likely to launch its IPO towards the end of the month, on the heels of successful offerings by Happiest Minds Technologies and Route Mobile. The specialty chemicals manufacturer is yet to file red herring prospectus but there are several reasons why this promising company should be on investors’ radar. We dived in draft prospectus to understand what makes Chemcon Specility Chemicals IPO special, here are a few points:
#1 Specialty chemicals with focus on Pharma and Hydrocarbon industries
Chemcon Speciality Chemicals makes two broad categories of products – Pharmaceutical Chemicals and Oilwell Completion Chemicals. In Pharmaceutical Chemicals, the company makes HMDS (Hexamethyldisilazane) and CMIC (Chloromethyl Isopropyl Carbonate) and is market leader in both products. It is the sole manufacturer of HMDS in India and was the eighth largest manufacturer of globally in 2018. It is noteworthy that India is a net importer of HMDS, with about 52% of its current domestic demand being catered by imports from China and Germany. In CMIC, it is the largest manufacturer in India and the second largest worldwide.
Similarly, its products Zinc Bromide and Calcium Bromide are used in the oil and gas exploration process as completion chemicals. Chemcon is the only producer of Zinc Bromide in India and is the largest manufacturer of Calcium Bromide in India.
#2 Strong manufacturing infrastructure and expanding
Chemcon has a centralized manufacturing infrastructure at Manjusar near Vadodara in Gujarat. According to the prospectus, the facility houses five plants, including one for manufacturing of HMDS and ancillary products, two for production of CMIC and two plants dedicated to the manufacturing of Oilwell Completion Chemicals. The company also has three warehouses for the storage of products and raw materials at the facility, apart from an in-house laboratory to test raw materials and products at the various stages of the manufacturing process. Besides its own facility, the company has leased two warehouses in Manjusar. This infrastructure is used for domestic and export operations.
The company plans to use IPO proceeds for capacity expansion and aims to set up three additional plants at the same facility by FY2021. It is also important to note that Chemcon is rebuilding one of the plants which was destroyed in a fire accident in January 2018.
#3 Sizable and increasing exports
Apart from the domestic market, the company exports its products to countries including USA, China, Japan, UAE, Azerbaijan, Serbia, Russia, and Malaysia. In FY2019, 2018 and 2017, its exports (including deemed exports) contributed 32.23%, 48.06% and 65.09% respectively of its total revenue from operations. While export’s contribution in total revenues has come down, absolute export revenues have expanded at a CAGR of 29.44% between these years.
#4 Well-diversified and long-standing customer base
The company has experienced a significant decline in customer concentration in recent years. Its top 10 customers accounted for 67.37% of revenues in FY2019, down from 77.88% in FY2017. Similarly, top 5 customers’ contribution saw a decline to 45.81% in FY2019 from 61.66% in FY2017.
Strong relationships with customers are usually a byproduct and Chemcon scores well on this front. In FY2019, 58.24% of its total revenue from operations was contributed by customers who have been consistently purchasing its products over the last five years. Another highlight is that 6 of its top customers for FY2019 have been with the company for over four years.
In Pharmaceutical Chemicals, its key customers include Hetero Labs, Laurus Labs, Aurobindo Pharma, Sanjay Chemicals, Lantech Pharmaceuticals, and Ind-Swift Laboratories. On the other hand, customers in Oilwell Completion Chemicals include Shree Radha Overseas, Water Systems Specialty Chemical DMCC, Universal Drilling Fluids and CC Gran Limited Liability Company.
#5 Chemcon Speciality Chemicals IPO: Strong financial footing
As visible in the points above, the company has been able to expand its business impressively. This is reflected in the financial performance of the company as well. In the last four years, Chemcon has been able to grow its revenues almost three times while its profits have surged 16X. This has been partly aided by the stricter environmental protection policies in China. In these years, profitability of the company has also improved considerably.
Another important factor behind Chemcon’s success has been a strong balance sheet. As on 31 March 2019, its total borrowing was INR33.1 crore, working to a debt to equity ratio was 0.35. In FY2019, the company’s Return on Capital Employed (ROCE) stood at an impressive 55.47% while Return on Equity (ROE) was also at a healthy level of 44.94%.
Chemcon’ financial performance (in INR crore)
|Net margin (%)
Quite clearly, there is no dearth of reasons to keep an eye on Chemcon Speciality Chemicals IPO. Nevertheless, final decision will depend on the pricing so stay tuned to IPO Central for more updates. Meanwhile, feel free to check the latest grey market price movements to understand how the market is receiving the IPO.