Chemplast Sanmar coming with an IPO to raise upto Rs 3930 crore

Chemplast Sanmar

• Chemplast Sanmar is coming out with a 100% book building; initial public offering (IPO) of 7,26,41,508 shares of Rs 5 each in a price band Rs 530-541 per equity share.
• Not less than 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not more than 15% of the issue will be available for the non-institutional bidders and the remaining 10% for the retail investors.
• The issue will open for subscription on August 10, 2021 and will close on August 12, 2021.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 5 and is priced 106 times of its face value on the lower side and 108.20 times on the higher side.
• Book running lead manager to the issue are ICICI Securities, Axis Capital, Credit Suisse Securities (India), IIFL Securities, Ambit Capital, BOB Capital Markets, HDFC Bank, IndusInd Bank and Yes Securities (India).
• Compliance Officer for the issue is M Raman.

Profile of the company

Chemplast Sanmar (CSL) is a specialty chemicals manufacturer in India with focus on specialty paste PVC resin and custom manufacturing of starting materials and intermediates for pharmaceutical, agro-chemical and fine chemicals sectors. CSL is one of India’s leading manufacturers of specialty paste PVC resin on the basis of installed production capacity, as of December 31, 2020. In addition, CSL is also the third largest manufacturer of caustic soda and the largest manufacturer of hydrogen peroxide in the South India region, on the basis of installed production capacity as of December 31, 2020 and one of the oldest manufacturers in the chloromethanes market in India. Pursuant to the CCVL Acquisition, it acquired 100.0% equity interest in CCVL that is the second largest manufacturer of suspension PVC resin in India and the largest manufacturer in the South India region, on the basis of installed production capacity as of December 31, 2020.

The company has four manufacturing facilities, of which three are located in Tamil Nadu at Mettur, Berigai and Cuddalore and one is located in Puducherry at Karaikal. Its integrated business model for production of specialty paste PVC resin and chloromethanes has been critical to its success. It has a coal-based captive power plant of 48.5 MW at its Mettur Facility and two natural gas-based captive power plants of 8.5 MW and 3.5 MW respectively, at its Karaikal Facility. It has also leased a salt field from the Government of Tamil Nadu at Vedaranyam, Tamil Nadu. It has approval from the TNPCB to extract up to 400 kt of salt per annum. It has a strong focus on sustainability in all aspects of its operations. Its manufacturing facilities are certified ISO 9001:2015 for quality management systems and ISO 45001:2018 for occupational health and safety management systems, to the extent required. In addition, it has received the Indian Chemical Council certification ‘Responsible Care’ for maintaining best practices in its operations.

Proceed is being used for:

• Early redemption of NCDs issued by company, in full.
• General corporate purposes.

Industry overview

The chemicals industry supports India’s agricultural and industrial development. It provides raw materials, intermediates and process chemicals industries such as for agro chemicals, detergents and soaps, textiles, paper, paints, pharmaceuticals, varnish. Specialty chemicals segment clocked 8-9% CAGR from financial years 2015 to 2020, driven by an increase in domestic consumption from various end-user industries and rising exports. CRISIL Research expects this segment to clock 5-6% CAGR during financial years 2020 to 2025 driven by rising domestic consumption and exports. Exports accounts for 35-40% of revenue for key speciality chemicals players in India. In financial year 2021, the industry witnessed a de-growth of 5-6% due to slowdown in economic activity which is likely to result in fall in demand from end use industries, The impact is expected to be significant on segments such as polymer additives, textile chemicals and colorants whereas segments such as agrochemicals, surfactants are likely to lend some support.

The size of the custom manufacturing market in India increased at a CAGR of 10% from financial year 2015 to financial year 2020. The Indian market is generally focused on pharmaceutical segment demand from various foreign players in mature markets such as US and Europe. The demand for custom manufacturing has shifted to the developing countries due to developing countries offering better cost economics compared to developed economies. The demand for custom manufacturing catered to by Indian manufacturers is likely to grow at around 12% CAGR between financial years 2020 and 2025, owing to higher penetration of pharmaceutical molecule or compound or API manufacturing and India becoming a key supplier of non-commercially available molecules or monomers/polymers. The COVID-19 pandemic has further strengthened the demand for pharmaceutical custom manufacturing in the country, with global pharmaceutical giants outsourcing vaccine manufacturing to Indian players. In addition to this, agrochemical custom manufacturing is also likely to see a boost with discovery chemistry pertaining to the agriculture sector attracting more traction.

Pros and strengths

Leadership position in industry with high barriers to entry: CSL is a specialty chemicals manufacturer in India with focus on specialty paste PVC resin and custom manufacturing of starting materials and intermediates for pharmaceutical, agro-chemical and fine chemicals sectors. CSL is one of India’s leading manufacturers of specialty paste PVC resin, on the basis of installed production capacity as of December 31, 2020. In addition, CSL is also the third largest manufacturer of caustic soda and the largest manufacturer of hydrogen peroxide, each in the South India region, on the basis of installed production capacity as of December 31, 2020 and one of the oldest manufacturers in the chloromethanes market in India. The company’s success in the chemicals markets is based on its ability to compete successfully in a technologically intensive industry, as well as its capability to identify, develop and improve the performance of specialty products which meet the stringent technical performance requirements of its customers. In custom manufacturing, it leverage its chemistry process research and manufacturing capabilities to focus on providing custom made intermediates to end molecules that are in the early stages of their life cycles. This gives it the opportunity to be the initial suppliers for such products to the patent holders.

Quality manufacturing facilities with strong focus on sustainability: The company has four manufacturing facilities, of which three are located in Tamil Nadu and one is located in Puducherry. Quality is a key differentiator in its business and has made strong efforts to adopt uniform manufacturing standards across all its facilities and to achieve standardized quality for all of its products. Its manufacturing facilities are certified ISO 9001:2015 for quality management systems and ISO 45001:2018 for occupational health and safety management systems, to the extent required. In addition, it has received the Indian Chemical Council certification ‘Responsible Care’ for maintaining best practices in its operations. Further, its manufacturing facilities have received several prestigious awards over the years including from FICCI, CII and Tamil Nadu State Government.

Operational excellence: The company has incurred significant capital expenditure to develop the specialty paste PVC resin manufacturing facility and intend to further invest Rs 2,560.00 million by Financial Year 2024 to further enhance its manufacturing capacity. Further, it had invested Rs 1,130.00 million in Financial Year 2020 to purchase plant, machinery and technology for its hydrogen peroxide plant. These investments position it well to capture future market growth and its commitment to operational excellence would allow it to remain an industry leader. Its network is well-managed with close quality control of its sites, dedicated IT systems and strong reporting tools, which allow information sharing and internal benchmarking. It also provide its employees with a range of regular internal trainings across all levels and divisions to foster the development of multiple skill sets, resulting in a more efficient utilization of its workforce. Its IT systems play a key role in its operations, helping it to efficiently manage its operations and providing it with a significant competitive advantage against smaller manufacturers.

Strong parentage and experienced management team: The company has a strong management team with extensive experience in the chemicals industry and a track record of operational excellence, which is necessary to successfully lead the development of its business. The key management team consists of 10 individuals who average approximately 30 years of experience in the industry. The commitment and strong track record of its management team provides stability in the execution of its business plan. It also invests significant resources in training its employees and its strong focus on employee development has enabled it to maintain high levels of employee retention over the years. Further, its key management team has, in the past, occupied, and continues to occupy, leadership roles in industry associations.

Risks and concerns 

Dependent on limited number of customers: The company is dependent on a limited number of customers for a significant portion of its revenues. Further, for its custom manufacturing operations, it is dependent on limited number of customers for a substantial portion of the revenues. It typically do not have firm commitment in the form of long-term supply agreements with its key customers and instead rely on purchase orders or short term arrangements to govern the volume and other terms governing sale of its products. Consequently, there is no commitment on the part of such customers to continue to place new purchase orders with it and as a result, its cash flow and consequent revenue may fluctuate significantly from time to time. The fluctuation in demand for its products may either require it to increase production or decrease production and inventories at short notice, which may result in it bearing additional costs and incurring losses.

Derives significant portion of revenues from sale of specialty paste PVC resin: The company derives a significant portion of its revenues from the sale of specialty paste PVC resin. However, the company’s revenue from the sale of specialty paste PVC resin may decline as a result of increased competition, regulatory action, litigation, pricing pressures, or fluctuations in the demand for or supply of such products including as a result of companies increasing their production capacities within India or outside India, or the outbreak of an infectious disease such as COVID-19, which may adversely affect its business, results of operations, cash flows and financial condition.

A significant portion of revenue generated from sale of products to end-user industries: A significant portion of the company’s revenue is generated from sale of its products to end-user industries such as pharmaceutical, automotive, textile, paper, soap and detergent industries and, consequently, the demand for its products and margin of its products is dependent on and directly affected by factors affecting these industries. Any material downturn in any of the end-user industries that it service, as a result of increased competition, regulatory action, litigation, pricing fluctuation or outbreak of an infectious disease like COVID-19 may impact it. There can be no assurance that the lack of demand from any one of these industries can be off-set by sales to other industries in which its products find application or by successfully introducing new products in these industries.

Manufacturing facilities concentrated in Tamil Nadu and Puducherry: All of the company’s manufacturing facilities are located in Tamil Nadu and Puducherry. In addition, it has leased a salt field from the Government of Tamil Nadu at Vedaranyam, Tamil Nadu from which it has approval to extract up to 400 kt of salt per annum (Vedaranyam Salt Field). Consequently, any significant social, political or economic disruption, or natural calamities or civil disruptions in Tamil Nadu or Puducherry, or changes in the policies of the state or local governments of Tamil Nadu or Puducherry or the Government of India, may require it to suspend its operations, either temporarily or permanently, incur significant capital expenditure and change its business strategy. The occurrence of, or its inability to effectively respond to any such event, could have an adverse effect on its business, results of operations, cash flows, and financial condition.

Outlook

Incorporated in 1985, Chemplast Sanmar is a leading specialty chemical manufacturer in India. The company is engaged in the manufacturing of specialty paste PVC resin, starting materials, and intermediates for agro-chemical, pharmaceuticals, agro-chemical, and fine chemical sectors. It also produces other types of chemicals such as Caustic Soda, Chlorochemicals, Hydrogen Peroxide, Refrigerant gas, and Industrial Salt. It has a coal-based captive power plant of 48.5 MW at its Mettur Facility and two natural gas-based captive power plants of 8.5 MW and 3.5 MW respectively, at its Karaikal Facility. It has also leased a salt field from the Government of Tamil Nadu at Vedaranyam, Tamil Nadu. Its network is well-managed with close quality control of its sites, dedicated IT systems and strong reporting tools, which allow information sharing and internal benchmarking. It also provide it employees with a range of regular internal trainings across all levels and divisions to foster the development of multiple skill sets, resulting in a more efficient utilization of its workforce. On the concern side, suspension PVC resin sales in India are subject to seasonal variations linked to monsoon. As a result of such seasonal fluctuations, going forward its consolidated sales and results of operations may vary by financial quarter and may not be relied upon as indicators of the sales or results of operations of other financial quarters, or of its future performance. It will continue to incur significant expenditure in maintaining and growing its existing infrastructure. It cannot assure you that it will have sufficient capital resources for its current operations or any future expansion plans that it may have.

The issue has been offered in a price band of Rs 530-541 per equity share. The aggregate size of the offer is around Rs 3849.99 crore to Rs 3929.90 crore based on lower and upper price band respectively. On the performance front, its total income increased to Rs 38,151.08 million for the Financial Year 2021 from Rs 12,655.10 million for the Financial Year 2020. Its profit after tax for the year increased to Rs 4,102.44 million for the Financial Year 2021 from Rs 461.25 million for the Financial Year 2020. Going forward, the company is proposing to expand its operations by increasing the installed production capacity of specialty paste PVC resin by 35 kt; setting up a multipurpose facility with two blocks for its custom manufacturing operations; and increasing the installed production capacity of suspension PVC resin by 31 kt by de-bottlenecking the suspension PVC resin plant. It also intends to improve its operational efficiencies in its manufacturing process at the Karaikal Facility by de-bottlenecking the caustic soda plant.