Laxmi Organic Industries coming with an IPO to raise upto Rs 605 crore

Laxmi Organic Industries

• Laxmi Organic Industries is coming out with a 100% book building; initial public offering (IPO) of 4,65,11,626 shares of Rs 2 each in a price band Rs 129-130 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 from March 15, 2021 and will close on March 17, 2021.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 2 and is priced 64.5 times of its face value on the lower side and 65 times on the higher side.
• Book running lead manager to the issue are Axis Capital and DAM Capital Advisors.
• Compliance Officer for the issue is Aniket Hirpara.

Profile of the company

The company is a leading manufacturer of Acetyl Intermediates and Specialty Intermediates with almost three decades of experience in large scale manufacturing of chemicals. Since its inception in 1989, it has been on a journey of transformation. It initially started manufacturing acetaldehyde and acetic acid in 1992, and soon thereafter moved on to manufacturing of ethyl acetate in 1996. It is currently among the largest manufacturers of ethyl acetate in India with a market share of approximately 30% of the Indian ethyl acetate market. Further, post completion of the YCPL Acquisition, its market share in the ethyl acetate market will be further enhanced. In Fiscal 2010, the company commenced manufacturing the Specialty Intermediates by acquiring Clariant’s diketene business.

The company’s products are currently divided into two broad categories, namely the Acetyl Intermediates and the Specialty Intermediates. The Acetyl Intermediates include ethyl acetate, acetaldehyde, fuel-grade ethanol and other proprietary solvents, while the Specialty Intermediates comprises of ketene, diketene derivatives namely esters, acetic anhydride, amides, arylides and other chemicals. Its products find application in various high-growth industries, including pharmaceuticals, agrochemicals, dyes & pigments, inks & coatings, paints, printing & packaging, flavours & fragrances, adhesives and other industrial applications. It also proposes to diversify into manufacturing of specialty fluorochemicals to which end, it has recently acquired assets including plant & machinery, design and operating paperwork, REACH registrations and patents of Miteni, a manufacturer of organic fluorospecialties and electrochemical fluorination. The company currently has two manufacturing facilities in Mahad, Maharashtra, with one facility dedicated to Acetyl Intermediates and another dedicated to Specialty Intermediates, which are strategically located in proximity to several ports and each other.

Proceed is being used for:

• Investment in company’s wholly owned subsidiary, Yellowstone Fine Chemicals (YFCPL) for part-financing its capital expenditure requirements in relation to the setting up of a manufacturing facility for fluorospecialty chemicals (Proposed Facility).
• Investment in YFCPL for funding its working capital requirements.
• Funding capital expenditure requirements for expansion of SI Manufacturing Facility (Proposed Expansion).
• Funding working capital requirements of company.
• Purchase of plant and machinery for augmenting infrastructure development at its SI Manufacturing Facility.
• Prepayment or repayment of all or a portion of certain outstanding borrowings availed by company and wholly owned Subsidiary, Viva Lifesciences (VLPL).
• General corporate purposes.

Industry overview

The chemical industry contributes approximately 6.6% of national gross domestic product and accounts for 15-17% of India’s manufacturing sector. The government permits 100% foreign direct investment (FDI) in this sector under the automatic approval route. The manufacturing of most chemical products inter-alia covering organic/inorganic, dyestuff and pesticides is de-licensed. The factors such as boost to specialty (as well as fine agrochemicals) chemicals due to rapid development in construction and agricultural sector, inadequate per capita consumption and strong demand from paints, textiles and diversified manufacturing base shall aid towards the development of Indian chemicals sector.

With the rapid globalisation and opening up of the Indian economy, 'Intellectual Capital' has become one of the key wealth drivers in the present international trade. Intellectual property rights have become significantly conspicuous on the legal horizon of India both in terms of new statutes and judicial pronouncements. Moving forward, with a total of over 300 USFDA approved manufacturing sites, the country can become the global leader in the CRAMS industry with the implementation of mandates including Schedule M (Good Manufacturing Practices (GMP) for Premises & Materials and Requirements of GMP in Plant and Equipment) outlining various requirements for manufacturing good quality drugs and pharmaceuticals, by applying Current Good Manufacturing Practice (CGMP) guidelines.

This has resulted in the launch of the Production Linked Incentive Scheme (PLI) for APIs, KSMs and DIs as well as the Scheme for Promotion of Bulk Drug Parks. These schemes have been constructed to incentivize large-scale manufacturing of critical bulk drugs and to build the required infrastructure for developing manufacturing clusters for across India. This aligns with the Government’s mission for self-reliance (atmanirbharta). In addition to the production linked incentive (PLI) scheme, the Department of Pharmaceuticals (DoP) is planning to allow the industry to import a maximum of 30% of the total value of chemicals/ intermediates. Having categorised pharma as a ‘priority sector’, the government is aggressively working on creating a single window clearance to expedite FDI and domestic investment in the pharma sector. The government is also expected to introduce a production-linked incentive scheme for the agro-chemicals sector with incentives of 10-20% output and creating an end-to-end manufacturing ecosystem through cluster development.

Pros and strengths

Leading manufacturer of ethyl acetate with significant market share: The company has also been one of the largest exporters of ethyl acetate to Europe from India since 2012. It has a long-standing presence in Europe with approximately two decades of experience in the sales of ethyl acetate in Europe and is the only Indian company engaged in the sale of ethyl acetate with a direct presence in Europe currently. Such experience and direct presence in Europe has enabled the company to establish and consolidate its position in Europe. Further, many multinational players are investing in India for manufacturing their flexible packaging, paints and coatings, adhesives and sealants, essentially catering to foreign destinations through exports. Its strategically located and backward integrated AI Manufacturing Facility as well as the economies of scale have, over the years, enabled it to maintain the consistency in quality of its products. Its manufacturing operations are further supported by large storage capabilities at its AI Manufacturing Facility as well as storage tanks in inter alia Mumbai (Maharashtra), Rotterdam (Netherlands), Antwerp (Belgium) and Genoa (Italy).

Only Indian manufacturer of diketene derivatives: Over the last decade, being the only manufacturer of diketene derivatives, pursuant to inter alia company’s R&D efforts and customer relationships it has rapidly gained domestic market share and held a market share of approximately 55 % of the Indian diketene derivatives market in terms of revenue in Fiscal 2020. Its SI Manufacturing Facility manufactures a range of specialty chemicals that cater to pharmaceuticals, colorants and agrochemical industries and also substitute possible imports. It was one of the largest suppliers of diketene based specialty intermediates in Europe from India in calendar year 2019. The increasing demand in pharmaceuticals and agrochemicals from developing economies like India is likely to increase the consumption of diketene and its derivatives, where the company has a very strong presence. Through its R&D initiatives and experience in handling complex chemistries, it has been able to unlock value by adding downstream and value-added products to its product portfolio of Specialty Intermediates.

Diversified customer base across high growth industries: The company’s products find application in a number of high growth industries including pharmaceuticals, agrochemicals, dyes & pigments, inks & coatings, paints, printing & packaging, flavours & fragrances, adhesives and other industrial applications. It has established long-standing relationships with marquee customers across various industries. The diversification of its customer base across various industries has enabled it to minimize impact of industry-specific disruptions on its business. To obtain greater assurance of demand and visibility in its manufacturing operations, it has entered into off-take arrangements with some of its customers which involve multi-year agreements, for certain specific products to give the necessary supply assurance to the customer.

In-house R&D capabilities and consistent track record of technology absorption: Research and development of new products to meet its customers’ requirements is a key growth driver of its business. It has two DSIR recognised research and development facilities (R&D Facilities), comprising of one R&D Facility located within the SI Manufacturing Facility which primarily deals with projects related to the direct application of ketene and diketene and its innovation center located at Rabale, Navi Mumbai, Maharashtra (the Rabale Innovation Centre), which predominantly works on development of new products for company based on complex chemistries. In order to expand its product portfolio, it has also developed five different chemistry platforms on a commercial scale, which include the following chemistries: ethyoxylation, chlorination, amination, methoxylation, thiolation and acylation. It has consistently invested in R&D and technology and has successfully implemented some of them based on market/customer demand at its Manufacturing Facilities over the years. Its technology development efforts and execution capabilities have enabled it to not only garner leading position in the domestic Speciality Intermediates market, but also made it a leader in several product groups globally. 

Risks and concerns

A large part of manufacturing facilities located in one geographic area: The company’s manufacturing operations and consequently its business is dependent upon its ability to manage the Manufacturing Facilities, which is subject to operating risks, including those beyond its control. In the event of any disruptions at its Manufacturing Facilities, due to natural or man-made disasters, workforce disruptions, delay in regulatory approvals, fire, failure of machinery, lack of continued access to assured supply of electrical power and water at reasonable costs, changes in the policies of the states or local government or authorities or any significant social, political or economic disturbances or civil disruptions in and around Mahad, Maharashtra, its ability to manufacture its products may be adversely affected.

Derive majority of income from Acetyl Intermediates: The company’s products are currently divided into two broad categories, namely the Acetyl Intermediates and the Specialty Intermediates. The Acetyl Intermediates include ethyl acetate, acetaldehyde, fuel-grade ethanol and other proprietary solvents, while the Specialty Intermediates include ketene and diketene derivatives and certain other specialty chemicals. The demand for company’s Acetyl Intermediates 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, it 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.

Need significant and continuous power, water, fuel and steam: The company’s manufacturing operations require a significant amount and continuous supply of power, steam and water and any shortage or non-availability may adversely affect its manufacturing operations. It has a co-generation power plant (the Captive Power Plant), two windmills located in Maharashtra and Karnataka and a hydro-electric power project at Yedgaon (collectively, the Power Facilities). During the nine months ended December 31, 2020, 53.04% of company’s Manufacturing Facilities’ power consumption was met from the Power Facilities. Its Manufacturing Facilities were dependent on the grid for 46.96% of its power consumption during the nine months ended December 31, 2020. Its power and fuel expenses accounted for 5.82%, 6.64%, 6.58% and 6.42%, respectively, of its total expenses on a consolidated basis in the six months ended September 30, 2020 and Fiscals 2020, 2019 and 2018. If the company fails to continue to utilise the Power Facilities or if any or all of the Power Facilities are disrupted, it may have to incur additional costs towards sourcing additional power and steam, which may result in an increase in its production costs and adversely affect its results of operations.

Operate in competitive business environment: 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 to 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 loss of market share or failure to improve its market position, any of which could substantially harm its business and results of operations.

Outlook

Incorporated in 1989, Laxmi Organic Industries is a specialty chemical manufacturer that operates in 2 business segments; Acetyl Intermediates (AI) and Specialty Intermediates (SI). It is the leading manufacturer of ethyl acetate with over 30% market share in the Indian ethyl acetate market and the only manufacturer of diketene derivatives in India. Its AI segment includes ethyl acetate, acetaldehyde, fuel-grade ethanol, and other proprietary solvents whereas the SI segment includes ketene, diketene derivatives namely esters, acetic anhydride, arylides, amides, and other chemicals. Its products are being used in various industries like pharmaceuticals, agrochemicals, inks & coatings, dyes & pigments, paints, printing & packaging, etc. In addition to India, the company has customers in over 30 countries including China, Netherlands, Russia, Singapore, United Arab Emirates, United Kingdom and United States of America. It has a strong and well experienced Board, which is supported by highly qualified functional heads and key managerial personnel who actively contribute to and participate in its strategies, operations and business development. On the concern side, a significant portion of company’s revenue from Speciality Intermediates has been generated from new products developed by it over the last decade. Its failure to continue to introduce new products and/or effectively commercialise such products may have an adverse effect on its revenue from operations, growth and prospects. It has material exposure to foreign exchange related risks since a significant portion of its revenue from operations are in foreign currencies.

The issue has been offered in a price band of Rs 129-130 per equity share. The aggregate size of the offer is around Rs 600 crore to Rs 604.65 crore based on lower and upper price band respectively. On the performance front, the company’s total income decreased by 2.27% to Rs 15,386.21 million in Fiscal 2020 from Rs 15,743.23 million in Fiscal 2019. Its profit after tax decreased by 3.01% to Rs 702.12 million in Fiscal 2020 from Rs 723.91 million in Fiscal 2019. As a part of the company’s growth strategy, it intends to maximise production volumes at its Manufacturing Facilities. Further, it also intends to expand the installed capacities at its Manufacturing Facilities to support its growth initiatives. It intends to diversify its existing product portfolio by adding new products (including downstream and value added products) which are synergistic with its existing products and chemistries. It intends to perform and deliver products pursuant to the long-term contracts already entered into with certain customers.