Paragon Fine and Speciality Chemical coming with IPO to raise Rs 51.66 crore

Paragon Fine and Speciality Chemical

• Paragon Fine and Speciality Chemical is coming out with a 100% book building; initial public offering (IPO) of 51,66,000 shares of Rs 10 each in a price band Rs 95-100 per equity share.
• The issue will open for subscription on October 26, 2023 and will close on October 30, 2023.
• The shares will be listed on NSE Emerge Platform.
• The face value of the share is Rs 10 and is priced 9.50 times of its face value on the lower side and 10.0 times on the higher side.
• Book running lead managers to the issue is Hem Securities.
• Compliance Officer for the issue is Vrunda Upendra Dattani. 

Profile of the company

The company is engaged in the business of custom synthesis and manufacturing of speciality chemical intermediates involving complex and differentiated chemistry. it commenced business as a partnership firm in the year 2004 and have, over the years, evolved into custom synthesis and manufacturing of Pharma Intermediates, AGRO intermediates, Cosmetics Intermediates, Pigment Intermediates and Dye Intermediates, etc. for a diverse base of Indian and global customers. It works with an approach towards chemistry combined with technology and systems that would lead to sustained product development. Its diverse range of products finds applications across various industries, including pharma, agrochemicals, cosmetics, pigments and dyes.

Its manufacturing facility situated at Viramgam District, Ahmedabad, Gujarat is spread across approximately 7000 square meters and is equipped with reactors enabling it to manufacture a diverse range of products. It also has a pilot plant with two glass line assembly and three reactors installed, for batch reaction technology. it uses various chemistry compositions like: Acetylation, Amination, Catalytic hydrogenation, Chlorosulfonation, Methoxylation, Nitration, Amidation, Ethoxylation, Sulphonation etc which enables it to cater to niche and advanced intermediate requirements of a wider range of end-products and applications.

It have a dedicated in-house research and development (R&D) facility which is equipped with laboratories engaged in development and innovation of catalytic process, new chemical screening, which assists it in pursuing efficiencies from the initial conceptualization up to commercialization of a product. The Department of Scientific and Industrial Research has also recognized its in-house R&D facility. It has a diversified products portfolio due to its research and development and technological capabilities.

Proceed is being used for:

• Funding capital expenditure towards civil construction work in the existing premises of factory.
• Repayment in full or in part, of certain of its outstanding borrowings.
• Funding capital expenditure towards installation of additional plant and machinery for expansion.
• Funding to meet working capital requirements.
• General corporate purpose.

Industry Overview

India’s chemicals industry is de-licensed, except for few hazardous chemicals. In the Indian chemical industry, alkali chemicals have the largest share with around 71.9% in the total production from April to July 2021 (FY22); production of polymers accounts for around 59% of the total production of basic key petrochemicals in 2019. The chemical industry is expected to contribute $300 billion to India’s GDP by 2025.

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 chemicals industry in India covers more than 80,000 commercial products with overall market size standing at $178 billion in 2018-19. The industry is expected to grow at 9.3% to reach $304 billion by 2025 on the back of rising demands in the end-user segments for specialty chemicals and petrochemicals. The specialty chemicals sector is expected to reach $40 billion by 2025.

Indian manufacturers have recorded a CAGR of 11% in revenue between FY15 and FY21, increasing India’s share in the global specialty chemicals market to 4% from 3%, according to the Crisil report. 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). 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. In FY22, India's dye exports totaled $3.24 billion.

Pros and strengths

Focus on R&D to leverage complex chemistry and technology: Its focus on product and process innovation through continuous R&D has been instrumental in the growth of its business and improved its ability to customize products for its customers as well as reduced its cost of goods while maintaining its margins. Its R&D is focused on enabling it to perform multi-step synthesis as well as developing in-house processes and identifying complex chemistries. It have a dedicated in-house R&D facility which is equipped with laboratories engaged in development and innovation of catalytic process, new chemical screening and engineering, which assists it in pursuing efficiencies from the initial conceptualization up to commercialization of a product.

Strong and consistent financial performance: It has demonstrated stable financial performance and particularly in the last three fiscal years, with improved margins even. It has demonstrated consistent growth over the years. Over the last three years, it has focused its attention towards expanding its product portfolio which has resulted in an increase in its revenue from operations and profits. Its profit after tax has also grown at a CAGR of 49.98% from Rs 439.77 lakh in the Fiscal 2021 to Rs 989.21lakh in Fiscal 2023. Its Profit after tax for stub period ended on June 30, 2023 was Rs 362.16 lakh. Its profit after tax margin was 12.58%, 9.67%, 5.42% and 5.28%for the stub period ended on June 30, 2023 and for Fiscal 2023, 2022 and 2021.

In-house manufacturing facility: Its manufacturing infrastructure is equipped with technology and systems that are key drivers for its products. Its manufacturing facility situated at Viramgam District, Ahmedabad, Gujarat is spread across approximately 7000 square meters. Its facility is equipped to function independently, with its own research & Development laboratory, pilot plant, quality department etc. Moreover, it sources majority of its raw material locally with minimum dependency on imports. 

Risks and concerns

Dependent on third party transportation providers: It uses third party transportation providers for the delivery of its raw material and products. Transportation strikes if happen could have an adverse effect on overall industry and accordingly may affect-its receipt of raw materials and its ability to deliver its products to its customers. In addition, transportation costs in India have been steadily increasing over the past several years. Continuing increases in transportation costs or unavailability of transportation services for its products may have an additional cost escalation which may have an adverse effect on its business, financial condition, results of operations and prospects.

Working capital requirements: Its business requires significant working capital including in connection with its manufacturing operations, financing its inventory, purchase of raw materials and its development of new products which may be adversely affected by changes in terms of credit and payment. A large amount of its working capital is blocked in trade receivables and inventories. Delays in payment under on-going purchase orders or reduction of advance payments and/or accelerated payments to suppliers, could adversely affect its working capital, lower its cash flows and materially increase the amount of working capital to be funded.

Face competition: Although the chemical industry provides for significant entry barriers, competition in its business is based on pricing, relationships with customers, research and development, product quality, customisation and innovation. It faces pricing pressures from companies, that are able to produce chemicals 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 multinational competitors which would adversely affect its business, financial condition and results of operations.

Outlook

The company is engaged in the business of custom synthesis and manufacturing of speciality chemical intermediates involving complex and differentiated chemistry. it commenced business as a partnership firm in the year 2004 and have, over the years, evolved into custom synthesis and manufacturing of Pharma Intermediates, AGRO intermediates, Cosmetics Intermediates, Pigment Intermediates and Dye Intermediates, etc. for a diverse base of Indian and global customers. It works with an approach towards chemistry combined with technology and systems that would lead to sustained product development. On the concern side, the company operates in a very niche industry which presents significant entry barriers, including customer validation and approvals, expectation from customers for process innovation and cost reduction, high quality standards and stringent specifications. 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 its costs of production, transportation and distribution and improve its operating efficiencies.

The issue has been offered in a price band of Rs 95-100 per equity share. The aggregate size of the offer is around Rs 49.08 crore to Rs 51.66 crore based on lower and upper price band respectively. On the performance front, the company’s total income for the financial year 2022-23 stood at Rs 105.01 crore whereas in Financial Year 2021-22 the same stood at Rs 84.58 crore representing an increase of 24.16%. The main reason of increase was increase in the volume of business operations of the company from domestic market. The Profit After Tax for the year increase by 120.30% from net profit of Rs 4.49 crore in in financial year 2021-22 to net profit Rs 9.89 crore in financial year 2022-23. Going forward, 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.