Rossari Biotech Ltd IPO; Favourite sector stock may see listing gains

Last Updated on October 22, 2020

Purpose of the offer

Net Proceeds of the issue are proposed to be utilized in:

• Repayment/prepayment of certain indebtedness.
• Funding working capital requirements.
• General corporate purposes.

About Rossari Biotech Ltd

‘Rossari Labtech’ was commenced as a partnership firm in specialty chemicals business in March 2003 by Mr. Edward Menezes and Mr. Sunil Chari as partners. Subsequently, by June 2009, the partnership firm was changed to a private company Rossari Biotech Limited.

Rossari Biotech (Rossari) is primarily a manufacturer of textile specialty chemicals, home, personal care and performance chemicals; and animal health and nutrition products.

Rossari provides customized solutions to specific industrial and production requirements of its customers primarily in the FMCG, apparel, poultry, and Animal feed industries.

Manufacturing and R&D Units

Rossari operates in India as well as in 17 foreign countries including Vietnam, Bangladesh, and Mauritius. However, the majority of the products are manufactured in-house from its manufacturing facility at Silvassa in the Union Territory of Dadra & Nagar Haveli. The Silvassa Manufacturing Facility has an installed capacity of 100,000 MTPA with an additional capacity of 20,000 MTPA in the process to be installed by March 2021.

They have two R&D facilities – one within the Silvassa Manufacturing Facility and another one in Mumbai.

Segments

The business is organized into three main product categories:-

• Home, Personal care, and Performance chemicals (38%)
• Textile specialty chemicals (52%)
• Animal health and nutrition products (10%)

MoneyWorks4me Opinion

Rossari operates in an industry where it is a supplier to the informed buyers. Although specialty chemicals earn better margins, there is always competition in the segment. The lowest cost manufacturer will win the order from the clients. The scale of operations also plays a role in low-cost manufacturing.

The key aspect of such businesses is better execution on capacity expansion, higher asset turnover from better product realization along with better working capital management to achieve maximum ROE. ROE is never very high compared to its cost of capital as competitive bidding and informed buyers follow a cost-plus approach.

While the business is sticky, as the vendor has to undergo strict quality checks before it selects its vendors. However, the demand from end customers may lead to drop in volume growth over the next 12-18 months due to the economic slowdown in the textile segment.

As per DRHP, the peers are Galaxy Surfactants, Fine Organics, Vinati organics, Atul Limited, and Aarti Industries and their size is much higher than Rossari Biotech.

We find that the current valuation is approx. 3.5x Market Cap to FY21 sales and around 19x EV/EBITDA ratio. In comparison, Rossari trades at a valuation similar to Aarti Industries (larger and better product mix) while Sudarshan Chemicals and Fairchem trade at 2x and Atul at 3x Market Cap to Sales.

We have heard from many chemical companies that the client is facing a slowdown, this may put chemical companies at risk of slower growth and hence, valuation de-rating. We do find merit in long term structural benefit chemical companies in India enjoy. We will wait for a better valuation to enter.

We do not find Rossari as a good long term investment due to its large exposure to the textile segment, newly listed status, and high starting valuation. We find Atul, Aarti Ind, Pi Ind, Fairchem Speciality (Privi Organics), Sudarshan Chemicals, and Navin Flourine are well placed in Chemical space for long term investment.

Current IPO can be looked at only from near term bounce post listing. We have been observing aggressive buying in the mid and small-cap by retail investors. Positive sentiment in mid and small-cap and presence in the current hot sector can lead to good listing gains in this IPO. Commit only risk capital and use a stop loss mechanism (15-20% lower from purchase) to invest in IPO.

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