Deepak Chemtex coming with IPO to raise upto Rs 23.04 crore

Deepak Chemtex

• Deepak Chemtex is coming out with an initial public offering (IPO) of 28,80,000 equity shares of face value of Rs 10 each in a price band Rs 76-80 per equity share.
• The issue will open for subscription on November 29, 2023 and will close on December 1, 2023.
• The shares will be listed on SME Platform of BSE.
• The share is priced 7.60 times of its face value on the lower side and 8.00 times on the higher side.
• Book running lead manager to the issue is Hem Securities.
• Compliance Officer for the issue is Sonam Sharma.

Profile of the company

The company is primarily engaged in the business of manufacturing of colorants finding its application in Food, Drug, Cosmetics, Cleaning compounds, Agriculture and other industries. Colorants are formulations of chemical intermediates, pigments or dyes and additives used to add colour to various consumables. It commenced its business in 1997 and has over the years evolved into manufacturing of a complete range of FD&C (Food, Drug and Cosmetic) colours used in the confectionary, bakery, desserts, beverages, dairy products, seasonings, pet foods, pharmaceutical products, cosmetics & personal care products. it also manufacture salt free dyes used in inkjet industry, pond dyes used in in ponds, lakes, swimming pools etc and other colorants used in car wash products, portable sanitation cleaners, detergent & soap, fuel, oil & lubricants, smoke, seed treatment, crop protection, fertilizer indicators, floral dyes etc.

Its manufacturing facility is situated at Ratnagiri District in Maharashtra and is equipped with glass lined reactors, boilers and stainless steel equipments and gets audited on a regular basis by its clients. It uses various production processes like: Sulphonation, Condensation, Bromination, Oxidation, Reduction, High pressure reactions, Purification etc which enables it to cater to niche and advanced requirements of a wider range of end-products and applications. It manufactures colorants from unwanted salts and isomers. The quality framework at its organization comprises of quality checks focused on shade testing, heavy metals detection, microbiological contamination tests and particle size analysis done by its in-house team. 

Its manufacturing facility is accredited with ISO 9001:2015 for quality management system for the manufacture and supply of chemical intermediates & dyes stuff. To ensure quality standards its manufacturing unit has also received HALAL certificate which guarantee that the food is prepared in accordance with Islamic law and is unadulterated and KOSHER certificate that a particular food item or product has been prepared in accordance with the Dietary Laws of Judaism. 

Proceed is being used for:

• Funding capital expenditure towards installation of plant & machinery in its existing premises.
• Investment in its subsidiary DCPL Speciality Chemicals for financing its capital expenditure towards installation of plant and machinery.
• Funding to meet working capital requirements.
• General corporate purpose.

Industry overview

India’s chemical industry is extremely diversified and can be broadly classified into bulk chemicals, specialty chemicals, agrochemicals, petrochemicals, polymers, and fertilisers. India is the 6th largest producer of chemicals in the world and 3rd in Asia, contributing 7% to India’s GDP. India's chemical sector, which is currently estimated to be worth $220 billion in 2022 and is anticipated to grow to $300 billion by 2025 and $1 trillion by 2040. Globally, India is the fourth-largest producer of agrochemicals after the United States, Japan and China. India accounts for 16-18% of the world production of dyestuffs and dye intermediates. Indian colorants industry has emerged as a key player with a global market share of around 15%. The country’s chemicals industry is de-licensed, except for few hazardous chemicals. India holds a strong position in exports and imports of chemicals at a global level and ranks 14th in exports and 8th in imports at global level (excluding pharmaceuticals).

The Indian chemicals industry stood at $178 billion in 2019 and is expected to reach $304 billion by 2025 registering a CAGR of 9.3%. The demand for chemicals is expected to expand by 9% per annum by 2025. The chemical industry is expected to contribute $383 billion to India’s GDP by 2030. An investment of Rs 8 lakh crore ($107.38 billion) is estimated in the Indian chemicals and petrochemicals sector by 2025. The specialty chemicals constitute 22% of the total chemicals and petrochemicals market in India. The demand for specialty chemicals is expected to rise at a 12% CAGR in 2019-22. The Department of Chemicals & Petrochemicals intends to bring PLI in chemical & petrochemical sector and will redraft the Petroleum, Chemicals and Petrochemicals Investment Region (PCPIR) guidelines.

A 2034 vision for the chemicals and petrochemicals sector has been set up by the government to explore opportunities to improve domestic production, reduce imports and attract investments in the sector. The government plans to implement production-link incentive system with 10-20% output incentives for the agrochemical sector; to create an end-to-end manufacturing ecosystem through the growth of clusters. The Indian Government supports the industry in research & development, reduced the basic customs duty on several products and offers support through the ‘Make in India’ campaign.

Pros and strengths

Wide range of products with ability to customize: It is offering a palette of hues for Food, Cosmetics, Pharmaceuticals, Agricultural, Household and Industrial applications. As a result, colours are developed in both water-soluble and insoluble forms with safety, availability, precision and adaptability in mind. Its cosmetic colorants are created noting skin friendliness, physical or chemical stability and pigment loading in formulas. Similarly detergent colorants include Non-staining, Concentrated liquid dyes, Completely Rinsable in water for Home Care, Household & Industrial cleaning Applications. It ensures that its colorants remain light, stable & pH stable for household care and industrial applications.

In-house manufacturing facility: Its manufacturing infrastructure is equipped with glass lined reactors and stainless steel equipment. Its manufacturing facility situated at Ratnagiri District in Maharashtra. Its facility has its own quality control department. Moreover it sources majority of its raw material locally with minimum dependency on imports. Its imported purchases account for 14.56%, 15.67 %, 4.83 % and 11.31 % of its total purchases for the stub period ended on September 30, 2023, Fiscal 2023, 2022 and 2021. Its manufacturing facilities employ manufacturing processes such as Sulphonation, Condensation, Bromination, Oxidation, Reduction, High pressure reactions, Purification etc which enables it to cater to niche and advanced requirements of a wider range of end-products and applications.

Stable and consistent financial performance: It has demonstrated stable financial performance over the years with growth in terms of profitability. Over the last three years, it has focused its attention towards expanding its product portfolio which has resulted in an increase in overall profitability. Its profit has also grown from Rs 263.47 lakh in the Fiscal 2021 to Rs 631.02 lakh in Fiscal 2023. For the stub period ended on September 30, 2023 its profit after tax is Rs 311.18 lakh. As of March 31, 2023 its debt equity ratio was 0.09 times and ROCE was 49.64 %. The stable growth in profits, ROCE and positive operating cash flows enable it to fund its strategic initiatives and pursue opportunities for growth.

Risks and concerns 

Does not have long-term agreements with suppliers: The raw materials it uses in its manufacturing process are primarily sourced from third party suppliers in India and some are also imported from China. In addition, it usually does not enter into long-term supply contracts/ agreements with any of its raw material suppliers and typically source raw materials from the open market. The absence of long-term contracts/agreements at fixed prices exposes it to volatility in the prices of raw materials that it requires and it may be unable to pass these costs onto its customers, which may reduce its profit margins. it faces a risk that one or more of its existing suppliers may discontinue their supplies to it, and any inability on its part to procure raw materials from alternate suppliers in a timely manner, or on commercially acceptable terms, may adversely affect its business, financial condition and results of operations.

Highly depends on manufacturing facilities: It conducts its operations through its manufacturing facility situated at Ratnagiri District in Maharashtra. The core of its business relies on efficient management of the manufacturing facility, however its operations face a spectrum of operational risks, some of which are beyond its control, such as the breakdown, failure of equipment or industrial accidents, severe weather conditions and natural disasters. Any significant malfunction or breakdown of its machinery, its plant & machinery, its IT systems may entail significant repair and maintenance costs and cause delays in its operations. Its inability to effectively respond to such events and rectify any disruption, in a timely manner and at an acceptable cost, could lead to the slowdown or shutdown of its operations or the under-utilization of its manufacturing facility, which in turn may have an adverse effect on its business, financial condition and results of operations.

Face competition: It face competition in its business based on pricing, relationships with customers, product quality, customization and innovation. It faces pricing pressures from companies, that are able to produce such products at competitive costs and consequently, may supply their products at cheaper prices. It is unable to assure that it shall be able to meet the pricing pressures imposed by such domestic or multinational competitors which would adversely affect its business, financial condition and results of operations.

Outlook

The company is primarily engaged in the business of manufacturing of colorants finding its application in Food, Drug, Cosmetics, Cleaning compounds, Agriculture and other industries. Colorants are formulations of chemical intermediates, pigments or dyes and additives used to add colour to various consumables. On the concern side, its competition varies by market, geographic areas and type of product. As a result, to remain competitive in its markets, it must continuously strive to reduce it costs of production, transportation and distribution and improve its operating efficiencies. There are various large and small manufactures that develop similar products that it sells. These players in the industry may have greater financial resources, technology, greater market penetration and operations in diversified geographies and product portfolios, which may allow them to better respond to market and technological trends.

The issue has been offered in a price band of Rs 76-80 per equity share. The aggregate size of the offer is Rs 21.89 crore to Rs 23.04 crore based on lower and upper price band respectively. On performance front, the Total income for the financial year 2022-23 stood at Rs 4,783.72 lakh whereas in Financial Year 2021-22 the same stood at Rs 5,443.68 lakh representing a decrease of 12.12%. Its profit after tax for the year increase by 49.14% from net profit of Rs 423.10 lakh in in financial year 2021-22 to net profit Rs 631.02 lakh in financial year 2022-23. Meanwhile, it intends to continue enhancing its operational efficiencies, to increase economies of scale, better absorb its fixed costs, reduce its other operating costs and strengthen its competitive position. It would focus on improving capacity utilization at its production facilities, through increase in its overall production volumes. It will continue to seek to manage its supply chain costs through optimal inventory levels, economic orders and other measures. Economies of scale will also enable it to continuously improve its operational efficiencies.