Neogen Chemicals IPO Analysis: Should you invest?

Neogen Chemicals IPO opens on 24 April as 8^th mainboard IPO in India this year. The upcoming IPO of the specialty chemicals player, priced in the range of INR212 – 215 per share, will remain open for subscription until 26 April. Investors can place orders for minimum 65 shares and in multiples thereafter. Following the positive listings of Metropolis Healthcare and Polycab India, retail investors are keenly looking at the IPO market and naturally, all eyes will be on Neogen Chemicals. Through this analysis of Neogen Chemicals IPO, we try to find out if investors should pin their hopes on the offer.

Neogen Chemicals IPO Analysis: Fresh + OFS

The IPO will involve a fresh issue of shares worth INR70 crore and these funds will be used towards:

• Prepayment or repayment of all or a portion of certain borrowings – INR20.5 crore
• Early redemption of 9.8% FRCPS – INR11.5 crore
• Long term working capital – INR20 crore
• General corporate purposes
• Issue expenses

In addition, 2,900,000 shares will be offered by existing shareholders, amounting to as much as INR62.35 crore at the upper end of the price band. The selling shareholders include promoter Haridas Thakarshi Kanani (1,699,600 shares) and promoter group shareholder Beena Haridas Kanani (1,200,400 shares).

It helps to know that there are no external investors in Neogen Chemicals.

The average cost of acquisition for promoters Haridas Thakarshi Kanani and Harin Haridas Kanani is INR1.14 and INR1.18 per share.

Neogen Chemicals IPO Analysis: Specialty Chemicals

The Thane-based player deals in a variety of specialty chemicals which includes bromine and lithium-based compounds. These compounds are widely used as pharmaceutical intermediates, agrochemical intermediates, engineering fluids, electronic chemicals, polymers additives, water treatment chemicals, construction chemicals and flavours and fragrances.

The company commenced business operations in 1991 and has manufacturing plants in Mahape, Navi Mumbai in Maharashtra and Karakhadi, Vadodara in Gujarat. Over the years, it has expanded its range of products and, as on 28 February 2019, it manufactured an aggregate of 198 products comprising 181 organic chemicals and 17 inorganic chemicals.

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In addition to manufacturing its standard products, the company also undertakes custom synthesis and contract manufacturing. In custom synthesis, the product is developed and customized primarily for a specific customer, but process know-how and technical specifications are developed in-house by Neogen. In contract manufacturing, the product is developed under confidentiality for a single customer using the process know-how and the technical specifications provided by the customer. Contract manufacturing has enabled Neogen to increase its bouquet of product offering.

As on 28 February 2019, it employed 152 full time, 45 fixed term contract employees and 4 retainers. Neogen Chemicals has 2 R&D facilities, one each in its Vadodara and Mahape manufacturing units. The R&D team has 20 members constituting around 10% of its total workforce.

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Neogen Chemicals IPO Analysis: Soaring top line, expanding margins

Neogen Chemicals has an excellent story to tell when it comes to financials. It has managed to expand top line in each of the last four years and is on track to repeat this feat once again in FY2019. This translates into a robust CAGR of 19.69% but more impressive has been the performance on the net income front which has expanded at an average annual rate of 30.29%. This has resulted in profitability zooming from 4.6% in FY2014 to 7.7% in the latest nine months of FY2019.

The company has managed to post this growth rate despite rising debt levels. In these years, total borrowings have ballooned from INR25.5 crore in FY2014 to INR115.6 crore as of 31 December 2018. In terms of debt to equity, this translates into the ratio of 1.86 in the latest as of 31 December 2018. This ratio will come down as a portion of IPO proceeds will be used towards lowering debt. Nevertheless, debt remains a concern.

Neogen Chemicals IPO Analysis: Should you invest?

During the 9 months ended December 2018, the company’s sales to the pharmaceutical industry accounted for 82.6% of its consolidated revenues. This is quite high and links the company’s fortunes closely with the global pharmaceutical industry. On the positive side, Neogen has a large and diversified set of customers. Its top 10 customers accounted for 60.2% for its consolidated revenues as of 31 December 2018.

Another important factor to watch out in case of Neogen is exchange rate movement as it generated 53.7% of its consolidated revenues in the latest nine months from exports. At the same time it imports Bromine Source, Lithium Source and organic raw materials. In the same timeframe, these imports accounted for 50.2% of its total expenses.

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Going forward, the company proposes to increase its manufacturing capacity at the Vadodara facility by an additional 126,000 litres which will nearly double its organic chemicals manufacturing capacity from 130,400 litres to 256,400 litres. In addition, it also plans to set up a new facility at Dahej in Gujarat for manufacturing inorganic chemical products. When completed, the Dahej facility will double its inorganic chemicals manufacturing capacity to 2,400,000 kg per annum.

As of now, the company hasn’t got long term contracts with its customers but plans to work in this direction by expanding its contract manufacturing business. The business line currently accounts for just 9.2% of Neogen’s top line but the company says it is in discussion with various companies in Europe and Japan to develop their proprietary products. Neogen claims to have already executed nondisclosure and secrecy agreements in this regard.

Despite all the positives, things can falter if valuations aren’t suitable. Neogen’s IPO price of INR212 – 215 per share and Earnings Per Share (EPS) of INR5.25 for FY2018 mean that the stock’s Price/Earnings (PE ratio) is in a tight range of 40.38 to 40.95. This appears quite high considering that several of its competitors among Aarti Industries, Atul Limited, Paushak Limited and Vinati Organics Limited are available at better valuations.

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Although bigger players such as Aarti Industries and Atul Limited trade at PE ratio of around 40, smaller competitors like Paushak Limited and Navin Flourine International are available at PE multiples of 30 and 20 respectively. Neogen Chemicals’ Return on Net Worth (RONW) is quite robust at 20.97% but is matched by Paushak Limited and Navin Flourine International. It is noteworthy that both these competitors posted net margins in excess of 20% in the latest year, much ahead of Neogen.

Overall, Neogen Chemicals IPO analysis reveals that the company is positioned to benefit from its specialized knowledge while also holding promise of better margins going forward due to debt reduction and expansion of contract manufacturing business. At the same time, the high asking valuations don’t seem to leave much on the table for retail investors. This pretty much leaves the IPO for investors with high risk appetite. Feel free to check out our discussion page for the IPO.