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Neogen Chemicals Limited IPO Note
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Offer Details

Price band

Rs 212-215 Per Equity Share

Offer Open Date

Apr 24, 2019

Offer Close Date

Apr 26, 2019

Lot Size

65 shares

Shares for Fresh Issue (mn)

3.256 - 3.302mn Shares

Shares for OFS (mn)

2.90mn Shares

Face value

Rs 10 Per Equity Share

Issue Type

Fresh of equity shares + offer for

sale of equity shares

Fresh Issue Size (Rs. mn)

Rs. 700mn

OFS Issue Size (Rs. mn)

Rs. 614.8 - 623.5mn

Total Issue Size

61,55,814 – 62,01,887 shares

(Rs. 1,314.8mn - 1,323.5mn)

Book Building

QIBs

30,77,907-31,00,943 shares (Rs 6.574-6.618mn)

Non-Institutional

9,23,372-9,30,283 shares (Rs 1.972-1.985mn)

Retail

21,54,535-21,70,660 shares (Rs 4.602-4.632mn)

Lead Managers

Batlivala & Karani Securities India Private Limited, INGA Advisors Private Limited

Exchange

BSE, NSE

Capital Structure

Pre Issue Equity

20,078,793 shares

Post issue Equity (lower band)

23,380,680 shares

Post issue Equity (upper band)

23,334,607 shares

 

Shareholding:

Promoter group holds 95.79 percent stake in the company and post-IPO their shareholding will come down to 70 percent. Public holding will increase from 4.21 percent to 30 percent.

Company Profile:

Neogen Chemicals Limited is one of India’s leading manufacturers of bromine-based, and lithium-based, specialty chemicals. Specialty chemicals, including bromine and lithium-based compounds, comprise pharmaceutical intermediates, agrochemical intermediates, engineering fluids, electronic chemicals, polymers additives, water treatment chemicals, construction chemicals and flavours and fragrances and are widely used for specialised applications to meet industry-specific requirements and can be classified based on application industries. Additionally, certain specialty chemicals find application in multiple industries.

The company manufactures specialty organic bromine-based chemical compounds (Bromine Compounds) and other specialty organic chemical compounds as well as specialty inorganic lithium-based chemicals compounds. It commenced its business operations in 1991, at its Mahape, Navi Mumbai manufacturing facility with a few Bromine Compounds and Lithium Compounds and has expanded its range of products over the years. As on February 28, 2019, company has manufactured an aggregate of 198 products comprising 181 organic chemicals and 17 inorganic chemicals. In addition, it also undertakes custom synthesis and contract manufacturing. Because of its expanded product profile, its revenue-mix is diversified across various chemical molecules.

Manufacturing facilities: Company operates out of two manufacturing facilities located in Mahape, Navi Mumbai in Maharashtra and Karakhadi, Vadodara in Gujarat. It is also developing a green-field manufacturing unit in Dahej SEZ, in Gujarat while also proposing to expand its operations in Karakhadi, Vadodara. Vadodara capacity expansion is a brownfield expansion and has the required regulatory approvals in place, whereas recently, the company has received the environmental clearance for the Dahej greenfield expansion. As on February 28, 2019, it employed 152 full time, 45 fixed term contract employees (generally a 5-year contract) and 4 retainers.

 

Facility

Nature of the Product

Capacity

Unit for capacity measurement

Capacity Utilization

9M ended Dec’18

FY18

FY17

FY16

Mahape

Organic Chemicals

45,000

Reactor volume in Litres

85.10%

78.66%

79.64%

94.01%

Vadodara

Organic Chemicals

85,400

Reactor volume in Litres

67.51%

56.01%

28.85%

-

Mahape

Inorganic Chemicals

12,00,000

Kg. Production per annum

74.10%

93.85%

91.19%

81.39%

Source: Company DRHP

 

Proposed expansion at Vadodara and Dahej:

Manufacturing Plant

Product

Unit for capacity measurement

Projected capacity when commissioned

Proposed Dahej facility

Inorganic Chemicals

Kg. production per annum

12,00,000

Proposed Vadodara facility

Organic Chemicals

Reactor volume in Litres

1,26,000

Source: Company DRHP


Customers: Neogen has established a customer base of about 1,363 customers of which about 1,237 are domestic customers and 126 customers are international customers which include Austin Chemical Company Inc., USA, CBC Co. Ltd., Japan, Divi’s Laboratories Ltd., Laurus Labs Ltd., Solvay Specialties India Pvt. Ltd, Thermax Ltd. and Voltas Ltd.

 Financial Overview:

 

 

FY16*

FY17*

FY18*

9M 2018*

YoY

Revenue from operations

1,088.9

1,214.7

1,640.1

1,592.3

35.02%

EBITDA

141.1

199.9

289.9

271.3

45.02%

EBITDA Margin (%)

13

16.5

17.7

17

120 bps

Reported PAT

51.8

76.8

105.0

122.2

36.72%

Adjusted PAT Margin (%)

4.8

6.3

6.4

7.7

10 bps

RoE (%)

18.8

18.3

21.0

19.9

270 bps

RoCE (%)

35.9

21.3

27.3

21.2

600 bps

Debt to Equity (x)

1.0

1.6

1.6

1.9

-

 

 

 

 

 

 

 

 

 

(* Rs. in Mn)

 

Neogen

 

Revenue from operations has increased at a CAGR of 22.7% from fiscal 2016 to 2018. For the same period, EBITDA and profit grew at a CAGR of 43.34% and 42.37%, respectively.

 Objects of the Issue:

Issue is a combination of fresh and OFS (offer for sale). The company will not receive any proceeds from the OFS part. Of the net proceeds from fresh issue –

  1. Around Rs. 205mn would be utilized for the prepayment or repayment of certain borrowings availed by the company;
  2. Rs. 115mn would be used for the early redemption of fully redeemable cumulative preference shares and;
  3. Around Rs. 200mn would be utilized for meeting the long term working capital requirement.
  4. Rest of the funds would be utilized for general corporate purposes.
 Competitive Strengths:
  1. Experienced promoters with domain knowledge
  2. Large and diverse array of products
  3. Diversified and stable customer base
  4. Growth led by continuous investment in R&D
  5. Specialized business model with high entry barriers
  6. Established and stable relationship with suppliers

 Key Risks

  1. Neogen Corporation has filed a commercial intellectual property suit against NCL which if determined against NCL may have an adverse effect on this Offer, its business and results of operations.
  2. Company is heavily reliant on the demand from application industries such as pharmaceuticals, agrochemicals, refrigeration and construction chemicals.
  3. Indebtedness and the conditions and restrictions imposed on Neogen Chemicals by its financing agreements.
  4. Company's business operations are subject to high working capital requirements. As on September 30, 2018, it had sanctioned working capital facilities aggregating Rs 680.00 mn.

 Peer Comparison:

Comparison with listed Industry Peers for the financial year ending March 31, 2018-

 

EPS (basic)

P/E

RoNW (%)

Neogen Chemicals

5.3

40.57*

22.98

Aarti Industries

38.92

31.65

22.40

Navin Fluorine International

36.34

22.54

19.96

Vinati Organics

27.93

35.77

19.49

Basic EPS (on standalone basis wherever applicable) as reported in company filings for year ending Mar’18.

*P/E at higher end of the price band of Rs. 215.

P/E for peer group at closing price of 23rd Apr’19.

 Update on IPO:

Neogen Chemicals raised Rs 39.7 crore from seven anchor investors at Rs 215 apiece, according to its exchange filings. These investors include SBI Funds, Axis Mutual Fund Trustee, Sundaram Mutual Fund and L&T Mutual Fund.

 Conclusion:

Based on the higher price band, Neogen Chemicals is demanding a P/E valuation of 40.57x (to its FY18 basic EPS of Rs. 5.3), which is at a premium to its peer average of 29.98x. However, considering its historical growth profile, proposed expansion activities, we feel the issue is fully priced. Further, with the issue size being lower than Rs. 2,500mn, shares will be listed in the ‘T’ group, which means there will be some restrictions on price movements.

Company's business operations are highly working capital intensive. It has an average working capital cycle of ~120 days over FY14-18, which is very high compared to the peer average of ~70 days. Valuations are mostly pricing in earning prospects, leaving little room for short-term gains. Slow growth in underline sectors such as pharma, high working capital intensity, high debt and dependence on certain customers pose risks. We thus, recommend "AVOID" rating.

Source: DRHP filings of Neogen Chemicals.

 

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