Vital Chemtech coming with an IPO to raise Rs 64.64 crore

Vital Chemtech

• Vital Chemtech is coming out with a 100% book building; initial public offering (IPO) of 64,00,000 Equity Shares of face value of Rs 10 each in a price band Rs 95-101 per equity share.
  
• The issue will open for subscription on October 31, 2022 and will close on November 3, 2022.
  
• The shares will be listed on NSE Emerge Platform.
  
• The face value of the share is Rs 10 and is priced 9.5 times of its face value on the lower side and 10.1 times on the higher side.
  
• Book running lead manager to the issue is Beeline Capital Advisors.
  
• Compliance Officer for the issue is Puja Paras Mehta.
  

Profile of the company

The company is engaged in the business of manufacturing of Phosphorus Derivatives Producuts. The company is manufacturer and supplier of Phosphorus base chemicals with highest quality practice and compliant with Highest Environmental, Health, and Safety (EHS) in chemical industry. The company has State of the Art Programmable Logic Controller (PLC) and Supervisory Control and Data Acquisition (SCADA) operated in integrated complex in PCPIR region of Dahej, Gujarat, India for manufacturing of phosphorus base chemicals. Manufacruring Facility of the company is having integrated manufacturing facility for manufacturing of phosphorus base chemical. Its manufacturing Facility located in Dahej, Gujarat, has been certified with ISO 9001:2015, ISO 45001:2018 and ISO 14001:2015 from Bureau Veritas to maintain highest quality, environmental and safety practices. Its plant is ZLD (Zero Liquid Discharge) to ensure minimum emissions and waste generation. The state of the art operation ensures organized uniflow state of the art manufacturing and supply sustainbility to its valued customers.

Presently the company manufactures Phosphorus Trichloride (PCl3), Phosphorus Oxychloride (POCl3), Phosphorus Pentachloride (PCl5),Phosphorus Pentoxide (P2O5), Poly Phosphoric Acid (PPA) and Phosphorus Pentasulfide (P2S5) for its customers across segments such as Lifesciences, Crop Care, Specialty Chemicals, Textile Auxillaries, Dyes, Pigments and Plastic Additives. The company also does trading of its raw Material. The company is in the process of obtaining approval of Phosphorus Pentasulfide (P2S5) from its customers.

Proceed is being used for:

• Meeting Working Capital Requirements.
  
• General Corporate Purpose.
  
• Meeting Public Issue Expenses.
  

Industry overview

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 $ 300 billion to India’s GDP by 2025. An investment of Rs. 8 lakh crore ($ 107.38 billion) is estimated in the Indian chemicals and petrochemicals sector by 2025. Chemical production reached 903,002 MT in December 2021, while petrochemical production reached 1,877,907 MT. In December 2021, production levels of various chemicals were as follows: Soda Ash: 257,199 MT, Caustic Soda: 277,638 MT, Liquid Chlorine: 190,492 MT, Formaldehyde: 22,794 MT and Pesticides and Insecticides: 22,110 MT.

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. A revival in domestic demand and robust exports will spur a 50% YoY increase in the capex of specialty chemicals manufacturers in FY22 to Rs. 6,000-6,200 crore ($ 815-842 million). From April 2021 to February 2022, exports of organic & inorganic chemicals increased 33.75% YoY to reach $ 26.48 billion. Revenue growth is likely to be 19-20% YoY in FY22, up from 9-10% in FY21, driven by recovery in domestic demand and higher realisations owing to rising crude oil prices and better exports. Despite the current pandemic situation, the Indian chemical industry has numerous opportunities considering the supply chain disruption in China and trade conflict among the US, Europe and China. Anti-pollution measures in China will also create opportunities for the Indian chemical industry in specific segments.

Pros and strengths

Prime Location of Manufacturing Facility: The company’s Manufacturing Facility is located at Dahej Industrial Estate of PCPIR Region of Gujarat. In this estate all the infrastructure facilities such as power, roads facilities, water etc. are developed by State Goverment. The Manufacturing Facility is strategically located. Its manufacturing units enjoy the good connectivity through National Highway roads and railway, which makes the movements of the raw material as well as finished goods easy and comfortable. Thus, it helps with smooth procurement of raw material from the suppliers and delivery of finished goods to the customers. The vicinity advantage adds to the cost effectiveness and reliability for its suppliers and customers.

Long-standing relationships with a diversified customer base: The company has been able to establish long term relationships through decades of association and collaborative efforts. Its key strength lies in the customer comprising of direct end use manufacturers only. Such an association has also allowed its products to be approved by its customers, which by itself takes considerably longer time due to the complex chemistries involved in the manufacture of the specialty chemicals. Its customer engagement involves tedious quality and performance tests of its products and facilities. This provides with an advantage as new entrants need to make significant efforts in approval procedures. During the time of less demand in the market, a diversified customer base provides it with a competitive advantage of sales supports.

Focus on Quality, Environment, Health and Safety: The company keep QEHS as the most primary & vital aspect of working. It is also focused on sustainability by keeping Quality, Environment, Health and Safety as key parameters. The management believes in maintaining high standards of quality, which is critical to its functioning and continued growth. Its manufacturing operations adhere to top quality manufacturing areas. High quality Instrumentation, application of PLC/SCADA base production to ensure consistent quality, efficacy and safety of products. The company is certified by Bureau Veritas for ISO 9001:2015; ISO 14001:2015 and ISO 45001:2018 standards. Many of its key customers have audited its plants and operation through stringent methods in previous fiscal years. Further to its sustainable effort for the environment and safety, its plant is ZLD (Zero Liquid Discharge) having organized methodology.

Risks and concerns

Do not have long-term agreements with suppliers: At present, the primary raw materials used for the company’s manufacturing process are yellow phosphorous, Chlorine, Oxygen and Molten Sulphur. It typically does not enter into long-term supply contracts with any of its suppliers with respect to its raw material requirements and typically place orders with them in advance of its anticipated requirements. Efficient inventory management is a key component of the success of its business, results of operations and profitability and to that end it maintain a reasonable level of inventory of raw materials, work in progress and finished goods at its manufacturing facility. While it forecast the demand and price for its products and accordingly, plan its production volumes, any error in its forecast due to inter alia the international scale of its operations and demand for its products, could result in a reduction in its profit margins and surplus stock, which may result in additional storage cost and such surplus stock may not be sold in a timely manner, or at all.

Profitability largely depends upon the global prices: The company’s 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 it currently manufactures all its products at its manufacturing facility at Dahej Gujarat, it may be unable to provide the products at competitive prices as against suppliers which are able to implement more cost – effective distribution models and other local suppliers in such foreign markets. Accordingly, it may be more exposed to the volatility to the global prices of its products as against competitors whose manufacturing operations are less centralised. There is no assurance that the prices of its products may sustain or further increase in the future. Any significant fall in prices of its products may have a material adverse effect on its business, results of operations and financial condition.

Working capital intensive: The company’s business requires significant amount of working capital primarily as a considerable amount of time passes between purchase raw materials and sale of its finished products and the subsequent collection process from its customers. As a result, it is required to maintain sufficient stock at all times in order to meet manufacturing requirements, thus increasing its storage and working capital requirements. Consequently, there could be situations where the total funds available may not be sufficient to fulfil its commitments, and hence it may need to incur additional indebtedness in the future or utilize internal accruals to satisfy its working capital needs. Its future success depends on its ability to continue to secure and successfully manage sufficient amounts of working capital.

Outlook

Vital Chemtech is engaged in the business of manufacturing of Phosphorus Derivatives Producuts. The company is a manufacturer and supplier of Phosphorus base chemicals with the highest quality practices and compliant with the chemical industry's highest environmental, Health, and Safety (EHS). Its manufacturing facilities are located at 3 Various Sites in the GIDC Area. Dahej area of PCPIR region and One is located in GIDC Area, Sanand District Ahmedabad. The company manufactures Phosphorus Trichloride (PCl3), Phosphorus Oxychloride (POCl3), Phosphorus Pentachloride (PCl5), Phosphorus Pentoxide (P2O5), Poly Phosphoric Acid (PPA) and Phosphorus Pentasulfide (P2S5) for its customers across segments such as Lifesciences, Crop Care, Specialty Chemicals, Textile Auxiliaries, Dyes, Pigments and Plastic Additives. On the concern side, the company’s business operations require it to obtain and renew, from time to time, certain approvals, licenses, registrations and permits under central, state and local government rules in India, generally for carrying out its business and for its manufacturing facilities.

The issue has been offered in a price band of Rs 95-101 per equity share. The aggregate size of the offer is Rs 60.80 crore to Rs 64.64 crore based on lower and upper price band respectively. On performance front, the total income for the period ended on April 30, 2022 was Rs 1,080.07 lakh which includes revenue from operations amounting to Rs 1,054.77 lakh and Other Income of Rs 25.30 lakh. Profit after Tax for the period ended on April 30, 2022 stood at Rs 135.18 lakh. During this period, the Company recorded Profit after Tax margin of 12.52% of Total Revenue. Meanwhile, the company intends to continue to leverage its existing sales and marketing network, diversified product portfolio and its industry standing to establish relationships with new multinational, regional and local customers and expand its customer base to grow its market share effectively. Going forward, it intends to increase its sales in export markets by increasing the wallet share of international customers. This shall subsequently increase its export revenues and global reach.