Chemcon Speciality Chemicals coming with an IPO to raise upto Rs 223 crore

Chemcon Speciality Chemicals

• Chemcon Speciality Chemicals is coming out with a 100% book building; initial public offering (IPO) of 65,59,173 shares of Rs 10 each in a price band Rs 338-340 per equity share.
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on September 21, 2020 and will close on September 23, 2020.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 33.80 times of its face value on the lower side and 34.00 times on the higher side.
• Book running lead manager to the issue are Intensive Fiscal Services and Ambit Capital.
• Compliance Officer for the issue is Shahilkumar Maheshbhai Kapatel.

Profile of the company

The company was originally incorporated as Gujarat Quinone Private Limited at Vadodara, Gujarat, India, as a private limited company under the Companies Act, 1956, pursuant to a certificate of incorporation dated December 15, 1988 issued by the RoC. Its Promoters and Promoter Group completed the acquisition of 100% of the Equity Share capital of the company in 2004 from the shareholders of the company at the time. Chemcon Engineers Private Limited (CEPL) was incorporated at Vadodara, Gujarat, India as a private limited company under the Companies Act, 1956, pursuant to a certificate of incorporation dated April 30, 1996 issued by the RoC. CEPL, a company largely owned and promoted by its Promoters and Promoter Group, merged into the company pursuant to an order of the High Court of Gujarat dated May 6, 2004 approving the Scheme of Amalgamation between CEPL and the company. Thereafter, to reflect the nature of activities of the company consequent to the Scheme of Amalgamation, the name of the company was changed to ‘Chemcon Speciality Chemicals Private Limited’ pursuant to the approval of the company’s Shareholders at an extra-ordinary general meeting held on July 24, 2004 and the fresh certificate of incorporation on change of name issued by the RoC on July 27, 2004. Subsequently, the company was converted into a public limited company pursuant to the approval of company’s Shareholders at an extra-ordinary general meeting held on November 28, 2018. Consequently, the name of the company was changed to ‘Chemcon Speciality Chemicals Limited’ and a Fresh certificate of incorporation consequent upon conversion to public limited company was issued by the RoC on April 10, 2019.

The company is a manufacturer of specialised chemicals, such as HMDS and CMIC which are predominantly used in the pharmaceuticals industry (the Pharmaceutical Chemicals), and inorganic bromides, namely Calcium Bromide, Zinc Bromide and Sodium Bromide, which are predominantly used as completion fluids in the oilfields industry. The company supply its products to domestic customers and also export its products to countries including United States of America , Italy, South Korea, Germany, People’s Republic of China, Japan, United Arab Emirates, Serbia, Russia, Spain, Thailand and Malaysia. The company is are an ISO 9001:2015 and ISO 14001:2015 certified company for the manufacture and supply of pharmaceutical intermediates, silanes and oilfield chemicals. Its manufacturing facility is located at Manjusar near Vadodara in Gujarat.

Within company’s manufacturing facility, it currently has seven operational plants of which two plants are dedicated to the manufacturing of HMDS and ancillary products (including one plant dedicated to the manufacturing of hi-purity HMDS), one multipurpose plant, currently being used for manufacturing of HMDS and other pharmaceutical chemicals, two plants are dedicated to the manufacturing of CMIC and two plants dedicated to the manufacturing of company’s Oilwell Completion Chemicals, along with three warehouses for the storage of products and raw materials. The company also has an in-house laboratory at manufacturing facility to test its raw materials procured, as well as products at the various stages of the manufacturing process. Further, it has five leased warehouses located outside its manufacturing facility, in Manjusar, Vadodara.

Proceed is being used for:

• Capital expenditure towards expansion of company’s manufacturing facility (Project).
• Meeting working capital requirements.
• General corporate purposes.

Industry overview

Domestic consumption for chemicals used as pharma intermediates is dependent upon bulk drugs manufacturing (domestic consumption as well as captive consumption by integrated players). Majority of large bulk drug players are forward integrated through presence in formulations as well. However, backward integration for large players through intermediates manufacturing is limited. The players in chemicals used as pharma intermediates domain mostly have footprints in specialty chemicals, which are supplied to pharmaceutical sector in addition to other sectors. Indian players, with better process chemistry skills, have relative advantage in custom synthesis, intermediates for drug discovery and contract manufacturing. India market of Chemicals used as pharma intermediates includes domestic consumption and exports. The overall market of chemicals used as pharma intermediates is anticipated to grow at 7-9% CAGR over the 5 year forecast period.

The share of imports in domestic consumption has dropped from around 65% in fiscal 2013 to around 58% in fiscal 2019. The drop in imports is majorly due to expiry of patents and withdrawal of customs duty exemption on drugs and intermediates in fiscal 2017. The imports of bulk drugs and intermediates are dominated by China. Large manufacturing units of China have economies of scale, supplying to several countries at a lower cost. The API/intermediates industry gets support from the government through export subsidy. Moreover, the cost of electricity is cheaper in China, which helps to maintain a cost advantage particularly in fermentation based products which have higher electricity requirements. However, an analysis of chemical exports from China shows that there has been a decline in exports from China in the past 2-3 years. Tougher regulations on the pollution causing industries have impacted the chemicals sector in China adversely. Indian intermediates players’ export competitiveness can be attributed to their greater expertise in specialised intermediates as compared with traditional intermediates.

Pros and strengths

Leading manufacturer in India of Oilwell completion chemicals: The company was the only manufacturer of HMDS in India and was the third largest manufacturer of HMDS worldwide in terms of production in calendar year 2019. It was the largest manufacturer of CMIC in India and the second largest manufacturer of CMIC worldwide, in terms of production and capacity in calendar year 2019.  The company was the only manufacturer of HMDS in India, and it is well positioned to capitalize on the potential growth of the HMDS market. By substituting imports and catering to India’s growing HMDS market, the company has immense opportunity in India. Additionally other countries of the world are dependent on China for their HMDS requirement, however with changing environment regulations, the trade from the country is low, giving opportunity to company to target China’s export customer base. Besides, it was the only manufacture of Zinc Bromide and the largest manufacturer of Calcium Bromide in India, in terms of production in calendar year 2019. Further, while it commenced the sales of its Oilwell Completion Chemicals in calendar year 2014, its share in the global production of the Oilwell Completion Chemicals has grown to 2.65% in calendar year 2019.

Diversified customer base coupled with long standing relationships:  The company supply its products to customers in India and also export its products to countries including United States of America, Germany, Italy, South Korea, People’s Republic of China, Japan, United Arab Emirates, Serbia, Russia, Spain, Thailand and Malaysia. In Fiscals 2020, 2019 and 2018, the company’s exports (including Deemed Exports) contributed 39.78%, 31.99% and 47.84% respectively of its total revenue from operations. The company has established relationships with its key customers. For instance, it conducts business with Aurobindo Pharma on the basis of purchase orders and they have been its client for over 20 years. 68.61% of its total revenue from operations in Fiscal 2020 was contributed by customers who have been consistently purchasing its products over the last five years. Its top seven customers for Fiscal 2020 have been its customers for over four years.

Specialty chemicals industry in which company operates has high entry barriers: The specialty chemicals industry in which the company operates has high entry barriers due to inter alia: (a) the involvement of complex chemistry in the manufacture of company’s Products, which is difficult to commercialize on a large scale and; (b) a long gestation period to be enlisted as a supplier with the customers, particularly with the customers of its Pharmaceutical Chemicals. The specialty chemicals industry is highly knowledge intensive. The company’s products have application in the pharmaceutical, oil-well drilling, semi-conductor and electronic-chemical industries where they are used to manufacture high value proprietary and specialised products. Given the nature of the application of its products, its processes and products are subject to, and measured against, high quality standards and stringent impurity specifications. Further, end products manufactured by its customers, where its products are used, and where such use has been formally recognized in filings with regulatory agencies, any change in the vendor of the product may require significant time and cost for the customer. Hence, customer acquisition involves a long gestation period, resulting in a very few players being involved in manufacturing of the products.

Manufacturing facility with dedicated plants: The company is ISO 9001:2015 and ISO 14001:2015 certified company for the manufacture and supply of pharmaceutical intermediates, silanes and oilfield chemicals. Its manufacturing facility is located in Manjusar, near Vadodara in Gujarat. The company’s manufacturing facility, has seven operational plants of which two plants are dedicated to the manufacturing of HMDS and ancillary products (including one plant dedicated to the manufacturing of hi-purity HMDS), one multipurpose plant, currently being used for manufacturing of HMDS and other pharmaceutical chemicals, two plants are dedicated to manufacturing of CMIC and two plants are dedicated to manufacturing of its Oilwell Completion Chemicals, along with three warehouses for the storage of its products and raw materials. The company is in the process of setting up two new plants, within its manufacturing facility.

Risks and concerns

Profitability largely depends upon the global prices of products: The company is dependent on the global prices for its products. There has been volatility in the global prices of certain of its products. Its ability to maintain as well as expand its international operations is dependent on it providing its products at prices competitive with international as well as local manufacturers. Since the company manufactures all its products at the Manufacturing Facility, it may be unable to provide the products at competitive prices as against suppliers able to implement more cost-effective distribution facilities and local suppliers. Accordingly, the company may be more exposed to the volatility to the global prices of its products as against competitors whose manufacturing operations are less centralised. Its inability to price its products at the applicable prices in the international markets, may affect the demand for its products and consequently have a material adverse effect on its results of operations and financial condition.

Derive significant portion of revenue from few customers: While the company typically has long term relationships with its customers, it does not have long term agreements with them. The success of its business is accordingly significantly dependent on it maintaining good relationships with its customers and suppliers. While the company has a number of customers, it is dependent on a limited number of customers for a significant portion of its revenue. The actual sales by the company may differ from the estimates of its management due to the absence of long term agreements. The loss of one or more of these significant customers or a reduction in the amount of business it obtains from them could have an adverse effect on its business, results of operations, financial condition and cash flows. It cannot assure you that it will be able to maintain historic levels of business and/or negotiate and execute long term contracts on terms that are commercially viable with its significant customers or that it will be able to significantly reduce customer concentration in the future.

Limited product portfolio: The company’s product portfolio is limited to its Pharmaceutical Chemicals, mainly HMDS and CMIC and its Oilwell Completion Chemicals, namely Calcium Bromide (solution and powder), Zinc Bromide (solution) and Sodium Bromide (solution and powder). A reduction in the demand for any of its products may have a materially adverse effect on its operations. The demand for its products may decline due to the emergence or increase in competition, as the case may be, regulatory action, pricing pressures and/or fluctuations of demand and supply. If company’s competitors are able to improve the efficiency of their manufacturing process or their distribution or raw materials sourcing process and thereby offer their products at lower price, the company may be unable to adequately react by reducing its gross margin to retain customers by offering its products at lower prices or losing customers to competitors offering similar products at prices lower than it. Similarly, in the event of any breakthrough in the development of products, the company’s products may become obsolete or be substituted by such alternatives.

Face competition: The company is required to compete both in the domestic and international markets. It may be unable to compete with the prices and products offered by its competitors (local as well as international). It may have to compete with new players in India and abroad who enter the market and are able to offer competing products. Its competitors may have access greater financial, manufacturing, research and development, marketing, distribution and other resources and more experience in obtaining the relevant regulatory approvals. Increasing competition may result in pricing pressures and decreasing profit margins or lost market share or failure to improve its market position, any of which could substantially harm its business and results of operations. It cannot assure you that it shall be able to compete with its existing as well as future competitors as well as the price and services offered by them. In addition, the company’s customers may enter into contract manufacturing arrangements with third parties, for products that they are presently purchasing from it. Its failure to successfully face existing and future competition may have an adverse impact on its business, growth and development.

Outlook

Incorporated in 1988, Chemcon Speciality Chemicals is a manufacturer of specialized chemical products i.e. HMDS and CMIC. Its product portfolio includes oilfield chemicals (Calcium Bromide, Sodium Bromide, and Zinc Bromide), Pharma intermediates, Silanes, and chemicals contract manufacturing work. The company supply its products to customers in India and also export its products to countries including United States of America, Germany, Italy, South Korea, People’s Republic of China, Japan, United Arab Emirates, Serbia, Russia, Spain, Thailand and Malaysia. It has experienced sustained growth in various financial indicators including its revenue and PAT, as well as a consistent improvement in its balance sheet position in the last three Fiscals, wherein it has seen an increase in its net worth. On the flip side, the company requires substantial power, water and fuel for its manufacturing facility, and energy costs represent a significant portion of the production costs for its operations. If energy or water costs were to rise, or if electricity or water supplies or supply arrangements were disrupted, its profitability could decline. Besides, the company is dependent on the services of its Promoters and Key Managerial Personnel, and its ability to attract, train, motivate and retain skilled employees and other professionals will enable it to manage and expand its business operations.

The issue has been offered in a price band of Rs 338-340 per equity share. The aggregate size of the offer is around Rs 221.70 crore to Rs 223.01 crore based on lower and upper price band respectively. On the performance front, the company’s total income decreased by 12.87% to Rs 2,660.17 million in Fiscal 2020 from Rs 3,053.26 million in Fiscal 2019. The company’s profit after tax increased by 13.50% to Rs 488.53 million in Fiscal 2020 from Rs 430.41 million in Fiscal 2019.  The company aims to expand the sales of the Oilwell Completion Chemicals in existing and new geographies including Nigeria, Malaysia, China and Ghana. It also intends to further consolidate its position in the geographic markets where it sell its products as well as expand into additional geographic markets. It intends to continue to be cost efficient in the production of its products.