By Aakash AthawasyaInitial public offering (IPO) season is in full swing and the most popular flavour seems to be chemical companies. With Heranba Industries witnessing a stellar subscription and listing two weeks ago, another chemical company hopes to follow suit - Anupam Rasayan.
The Surat-based specialty chemical company makes essential chemicals for the agrochemical, pharmaceutical, and industrial sectors. Even with these diverse offerings, investors hoping to ride the agrochemical wave should be wary of Anumpan Rasayan’s high valuations, low return on equity, and mounting debt.
Discounted preferential allotment problems
Anupam Rasayan’s promoters are Anand Desai, Mona Desai, and Kiran Patel, an Indian-American billionaire businessman, who initially came in as an investor in FY18. Patel does not hold any stake in the company directly. However, his US-based investment arm Kiran Pallavi Investments (KPI) holds 3.6 crore equity shares or a 42% stake in the company. The Desai family holds a 33.7% stake and the rest (23.2% stake) is held by Milan Thakkar, a non-executive director of the company.
The offering is a complete fresh issue of 1.3 crore equity shares. At the upper end of the Rs 552-555 price band, Anupam Rasayan will raise Rs 760 crore from the IPO. This would put the post-IPO market capitalization of around Rs 5,500 crore, making it the fifth-largest listed agrochemical company in India by market capitalization.
Post the IPO, the Desai family’s stake will drop to 29% (from 33.7%), KPI’s to 36.5% (from 42.7%), and the public will hold 36.7% of the company.
In FY18, the company issued compulsory convertible preference shares (CCPS) to KPI worth Rs 18.7 crore. This was used to fund the annual capital expenditure. This carried on till FY21. Between September to November 2020, KPI acquired a total of 80.8 lakh CCPS at a weighted average price of Rs 227 per share. This is at a discount of 59% against the upper IPO price. These preference shares were converted to equity shares prior to the filing of the red herring prospectus (RHP).
Anupam Rasayan’s earnings per share (EPS) for the nine months ended December 2020 stood at Rs 6.03 per share. This gives it a price to earnings multiple of 92 times the 9MFY21 earnings, which is very high compared to its listed peers.
Of the Rs 760 crore estimated to be raised through the IPO, Anupam Rasayan will use nearly 75% (Rs 563 crore) to repay debts. The rest will be used for general corporate purposes. No amount of the fresh issue is allocated for capex.
Slowing revenue growth squeezing profit margins
Anupam Rasayan’s FY20 revenue was Rs 528.8 crore, an underwhelming 5.5% rise over the previous year. Between FY18 to FY19, revenues rose by 47% to reach Rs 501 crore. This was due to several domestic and international agrochemical companies shifting their supply chain away from China.
For the nine-months ended December 2020, revenues were Rs 539 crore, a 45% jump YoY. With one quarter to go in FY21, the company’s revenue has already surpassed its FY20 mark.
The company’s operating profit for FY20 was Rs 116 crore, a 30% jump YoY. For the nine-months ended December 2020, operating profits equaled the FY20 value - Rs 116 crore a jump of 33% YoY. However, operating margins were 21.6%, which is a 190 basis points drop from the previous year.
Operations have been quite strong as the company has maintained gross margins of 45% and earnings before interest, and tax (EBIT) margins of 52% between FY 18-20.
Profit after tax (PAT) in FY20 was Rs 53 crore, a 7.6% rise on a YoY basis. For the nine-months ended December 2020, PAT was Rs 48 crore, a 12.3% increase YoY. A concern for investors will be the decreasing PAT margins, due to revenue growth outpacing profit growth. The PAT margins for the nine months ended December 2020 was 8.9%, against 11.5% in the year-ago period. Between FY 18-20, the company maintained PAT margins of 10-12%.
Another concern for investors is the return on equity (RoE). Listed agrochemical companies record RoE in the range of 15-20%. This is much higher than Anupam Rasayan’s FY20 RoE of 9.6%. Not only is the company’s RoE lower relative to its peers, but the RoE has also been consistently decreasing.
Negative free cash flows with high cash balances
Anupam Rasayan’s operating cash flows since FY18 have been positive, but not enough to account for its capital expenditure (capex). In FY20 operating cash flows rose nearly 1.5x from the previous year to Rs 95 crore. However, for the nine months ended December 2020, the operating cash flow was Rs 13.9 crore, the lowest in three years, and an 86% drop YoY.
With the massive capex spree the company has been on since FY18 (Rs 800 crore in fixed assets acquisition), Anupam Rasayan generated no free cash flows. Even accounting for the cash and cash equivalents, cash flows remain negative. A silver lining of hope is cash on hand increasing as the company steadily decreases capex. In FY20, capex was Rs 180 crore (34% of annual revenue) down from Rs 255 crore in FY 18 (74.8% of annual revenue).
With capex decreasing, Anupam Rasayan’s cash balances rose. In FY20, cash balances were Rs 20 crore, a 10x growth YoY. For the nine months ended December 2020, cash was 73 crore, a 5.5x increase against the year-ago period.
High leverage - alarming debt-to-equity
Given that the company’s intended use of the IPO proceeds is to reduce debt, it comes as no surprise that Anupam Rasayan is highly leveraged. At the end of FY20, long-term borrowings were Rs 580 crore, a 12.7% rise YoY. As of December 31, 2020, the long-term borrowings rose by 13% in nine months to Rs 655 crore.
For the nine months ended December 2020, Anupam Rasayan’s debt-to-equity ratio stood at an alarming 1.2 times.
Of the Rs 516 crore long-term borrowings, 40% or Rs 206 crore is advances given by the majority shareholder - KPI, and the rest term loans from banks and other companies. The short-term borrowings of Rs 187 crore were used to finance 76% of the working capital requirements for the nine months ended December 2020.
Its debt burden will continue in Q4FY21. Over 21% of long-term debt is maturing in FY21, amounting to Rs 138 crore. This includes Rs 51 crore due to KPI.
Triple Agro-Pharma-Industrial play is a risky bet
Anupam Rasayan manufactures specialty chemicals for two industries - agrochemical, and pharmaceuticals. Specialty chemicals for the agrochemical industry are mainly crop protection chemicals which accounted for 70% of FY20 revenue. Pharmaceutical demand comes from active pharmaceutical ingredients (API) makers. It also manufactures industrial specialty chemicals used by FMCG companies in personal care products and paint and construction companies as dyes, pigments and polymers additives, which made up 5% of FY20 revenue.
India is a net exporter of agrochemicals, with 50% of domestic production earmarked for exports to Europe, North America and South East Asia. Like most domestic agrochemical companies, Anupam Rasayan has a strong export focus. For the nine-months ended December 2020, over 60% of revenues came from exports.
According to Frost & Sullivan, the Indian agrochemical market is expected to benefit from the ‘China plus one’ strategy. This will drive the industry to grow at a compounded annual growth rate (CAGR) of 11% in the next five years. Over the past few years, the Chinese government has closed several chemical factories due to rising pollution levels. On the other hand, Indian speciality chemical consumers were spooked by the central government considering a customs duty on Chinese chemicals in Q1FY21. This forced them to turn to Indian chemical companies for import substitutes.
Even with the existing tailwinds, both domestically and internationally, Anupam Rasayan does not occupy a strong position in the domestic agrochemical market.
The only thing going for Anupam Rasayan is the fact that it has dipped its feet in three specialty chemical markets - agrochem, pharmaceuticals, and industrial chemicals. Most companies stick with one vertical. However, this shouldn’t perk up investors as there are several issues that come with owning this company. From the pricing disparity between CCPS to the IPO price band, the low return on equity, significantly high valuations and rising debt. The problems are plenty.
Even with the agrochemical industry expected to receive a production-linked incentive (PLI) boost soon and demand shifting away from China, there are other financially sound agrochemical companies investors can pick.