In another big week of initial public offerings (IPOs) comes a company that was already in public markets nearly a decade ago. After it delisted in 2012, Chemplast Sanmar (Chemplast) is once again heading to the primary markets to sell its shares to investors. Its IPO opens on August 10, the same day as Aptus Value Housing Finance.
Chemplast was first listed on bourses in 1992 as Chemicals and Plastics India before its name was changed to Chemplast Sanmar in 1995. In 2012, the chemicals company’s promoters voluntarily delisted its shares from stock exchanges. Between 2010-2012, the company was going through a difficult phase due to the price volatility of crude oil following the global financial crisis. This resulted in delays in commissions for the company leading to the accumulation of debt. When it delisted, the company’s total debt was six times its net worth at the time.
Chemplast is a specialty chemical company and part of the Chennai-based Sanmar Group. Specialty chemical companies had a good FY21 as pharmaceutical and agrochemical demand from China shifted to India due to the Chinese government move to cut pollution.
Chemplast is a different specialty chemical company with its main customer base being neither pharmaceuticals nor agrochemical companies, but leather producers. On day one of the bidding process, the company received bids for 16% of its shares on offer. Should investors remain hesitant about this unique play on the specialty chemical market?
Making a comeback after nearly a decade
Chemplast’s promoter is Sanmar Holdings Limited (SHL), the holding company of the Sanmar Group. SHL holds a 98.8% stake in Chemplast, the rest is held by group companies - Sanmar Engineering Services, Sanmar Group International, and Sanmar Overseas Investments.
The company’s IPO issue size is worth up to Rs 3,850 crore divided between a fresh issue of 4.7 crore shares worth Rs 2,550 crore, and an offer for sale (OFS) of 2.4 crore shares worth Rs 1,300 crore by the promoter and promoter group. After the IPO, the promoter’s stake in the company will drop to 55%, and the public will hold 45% of the company.
The IPO price band is Rs 530-541 per share. Post the issue, at the upper end of the price band, Chemplast will be valued at nearly Rs 8,500 crore. On August 9, the company raised Rs 1,732 crore (45% of the issue) from anchor investors at Rs 541 per share.
Chemplast is valued at 17 times its FY21 earnings and is the cheapest among listed specialty and commodity chemical companies.
From the Rs 1,300 crore proceeds of the fresh issue, the company will use 95% (Rs 1,238.5 crore) to pay off debt.
Specialty chemical maker for the leather industry
Chemplast makes specialty chemicals like specialty paste polyvinyl chloride (PVC) resin, which is used by footwear, auto accessories, and furniture companies to make leather. The only other domestic company that produces specialty paste polyvinyl chloride (PVC) resin is Finolex Industries. Chemplast also produces key starting materials, base chemicals, and intermediates for pharmaceutical, agrochemical, and other chemical companies. These products include caustic soda, vinyl chloride, chloromethanes, chlorine, refrigerant gas, and hydrogen peroxide.
The company’s parent firm Sanmar Holdings Chemicals Group (SHCG) is engaged in the chemicals industry, through Chemplast, engineering through Sanmar Engineering Services, and shipping through Sanmar Shipping. SHCG counts Fairfax India Holdings Corporation, the Indian subsidiary of global insurance company Fairfax, and its founder Prem Watsa as its investors.
In March 2021, Chemplast acquired a 100% stake in Chemplast Cuddalore Vinyls Limited (CCVL), part of the Sanmar Group, for close to Rs 3,300 crore. According to Crisil Ratings, CCVL is the second largest domestic manufacturer of PVC resin based on installed capacity.
Chemplast also operated Mowbrays Corporate Finance (MCF), a group company, under a joint venture with Sanmar Group International (SGIL). In December 2020, Chemplast ended the joint venture agreement. The group company SGIL was an associate of Chemplast until March 2021. Hence, SGIL’s financials are included in the calculations of Chemplast’s consolidated numbers for FY21. Both the group entities, MCF and SGIL, reported a net loss in FY21. However, these loss-making companies will not be part of Chemplast’s consolidated numbers in FY22.
Revenue triples in FY21 due to acquisition of the group company
In FY21, Chemplast recorded revenues of Rs 3,798 crore, a three-fold increase YoY due to the acquisition of CCVL. If CCVL’s revenues were excluded, revenue would’ve grown by just 2.3% YoY to Rs 1,287 crore. Net profits in FY21 were Rs 410 crore, higher by nearly 9X over the previous year.
The company’s EBITDA in FY21 was Rs 1,127 crore, a 4.4X growth YoY due to the inclusion of CCVL’s EBITDA. The company’s EBITDA margins remain healthy at 29.7%, in line with its specialty and commodity chemical peers.
Debt jumps by 9X in two years, negative net worth in FY21
Chemplast’s debt levels are rising and it has a negative net worth. In FY21, total borrowings were Rs 2,110 crore, a 63% rise against the previous year. Between FY19-21, its debt levels rose by 7.3X.
The company plans to reduce its debt by 58% using the proceeds of the fresh issue.
In FY21, Chemplast’s operating cash flows were Rs 1,076 crore, a 6.4X growth against the previous year. Capital expenditure (capex) in FY21 was Rs 66 crore (45% growth YoY) to build a water storage tank and ethylene precooling pipelines in its Tamil Nadu facilities.
In its red herring prospectus, Chemplast stated that it would spend Rs 620 crore in capital expenditure (capex) between FY22-25 to build additional PVC resin manufacturing facilities. For this, the company had adequate free cash flows of Rs 1,021 crore as of FY21.
Does a leather chemical producer have leeway for growth?
While specialty chemicals used in leather products are not in the limelight, the market is expected to grow at a compounded annual growth rate (CAGR) of 5-7% in the next five years. In FY21, specialty paste PVC resin consumption was 125 kilotonnes per annum (KTPA) and is expected to reach 185 KTPA by FY25. Chemplast has a 75% market share in the specialty paste PVC resin with a current production capacity of 66 KTPA and it will increase capacity by 53% in FY24.
India is a net importer of specialty paste PVC resin from South Korea, China, the UK, Germany, and the USA. However, leather consumption industries are increasingly shifting to import substitutes. This is because between 2018-20 many PVC resin-producing companies in these countries closed (this includes Formosa Plastics Corp, Vinnolit, Dongxing Chemical Co., and LG Chem) due to rising pollution levels. India also increased import duties on PVC resin to 10% in FY20 from 7.5% in FY19. This coupled with a recovery in the automobile industry post the second wave, rising consumption of leather products, and government initiatives like the production linked incentive (PLI) scheme are expected to boost domestic demand for Chemplast’s chemicals.
Investors have lapped the specialty chemical companies’ shares because these companies make products critical to the pharmaceutical and agrochemical industry. But a specialty chemical maker catering primarily to the leather industry, which has a sizeable market share (75%), presents a different investment opportunity. However, the company’s negative net worth, rising debt levels, present some challenges. This could be the reason the valuation that the company is asking for its share in the IPO is cheaper than its peers to attract investor interest