A long-lead project, risky nature of business and steep pricing make Chemcel Biotech’s IPO unattractive
COMPANY: CHEMCEL BIOTECH
ISSUE SIZE: Rs 24.64 CRORE
PRICE: Rs 16
DATE: SEPTEMBER 9-12, ’08
CHEMCEL BIOTECH (CBL) is a Hyderabad-based regional agrochemicals company focusing on five districts of Andhra Pradesh. The company is coming out with an IPO to raise Rs 24.64 crore, which will be used to set up a bio-diesel plant and repay loans. Considering the company’s weak financials and small size, unattractiveness of the industry in which it operates, and uncertainties over the successful implementation and future profitability of its proposed bio-diesel project, we find the IPO too expensive. Investors can give it a miss.
BUSINESS:
CBL is a pesticide formulator with 34 product registrations to manufacture pesticides for crops such as paddy, cotton and sugarcane. It plans to expand its reach to entire Andhra Pradesh over the next 12 months. The agrochemicals industry in India is seasonal, highly competitive and directly dependent on the vagaries of nature; hence, it is working capital intensive. The company’s products are in three formats — liquids, granules and dusts. CBL has 1,000 kilolitres of liquid capacity, 1,000 tonnes of granules and 300 tonnes of dusts capacity. During FY08, the average capacity utilisation was around 30%. Around 40% of the IPO proceeds will be invested to set up a small 6,000 tonne per annum bio-diesel plant in Andhra Pradesh, which will need to process 20,000 tonnes of jatropha oil seeds every year.
The company, through its 60% subsidiary Jetro Petro Biotech, has entered into long-term contracts with 179 farmers for growing jatropha plants in their land aggregating 2,000 acres.
Commercial production from this biodiesel plant is expected to commence by September ’09.
As the jatropha cultivation is just a year old in the areas contracted by the company, it may have to source feedstock from the open market for the first few months after it commissions the bio-diesel plant. This may depress the capacity utilisation levels and profitability. Another 40% of the IPO proceeds will be used to fund the company’s working capital needs and the remaining 20% will be used to repay part of its outstanding loans.
FINANCIALS:
For the year ended March ’08, the company’s sales grew 5% to Rs 24.6 crore. Though operating margins gained 220 basis points to 11.5%, a steep jump in interest costs pulled down profit before tax (PBT) growth to 13%. However, a fall in tax provisions helped the company to report 32% growth in net profit.
The company had negative cash flows for the past three years. This led CBL to raise funds via issue of equity capital and loans. In FY06 and FY07, its equity capital jumped nearly 10-fold, while outstanding loans doubled.
VALUATIONS:
The IPO price at Rs 16 is 33.8 times the company’s FY08 earnings based on post-issue equity of Rs 25.92 crore. Small and medium agrochemical companies such as Dhanuka Agritech, Insecticides India, Bhagiradha Chemicals and Bharat Rasayan are trading at P/E multiples of 3-9.
Till CBL’s bio-diesel plant commences production after one year, the company is not expected to report much growth.
COMPANY: CHEMCEL BIOTECH
ISSUE SIZE: Rs 24.64 CRORE
PRICE: Rs 16
DATE: SEPTEMBER 9-12, ’08
CHEMCEL BIOTECH (CBL) is a Hyderabad-based regional agrochemicals company focusing on five districts of Andhra Pradesh. The company is coming out with an IPO to raise Rs 24.64 crore, which will be used to set up a bio-diesel plant and repay loans. Considering the company’s weak financials and small size, unattractiveness of the industry in which it operates, and uncertainties over the successful implementation and future profitability of its proposed bio-diesel project, we find the IPO too expensive. Investors can give it a miss.
BUSINESS:
CBL is a pesticide formulator with 34 product registrations to manufacture pesticides for crops such as paddy, cotton and sugarcane. It plans to expand its reach to entire Andhra Pradesh over the next 12 months. The agrochemicals industry in India is seasonal, highly competitive and directly dependent on the vagaries of nature; hence, it is working capital intensive. The company’s products are in three formats — liquids, granules and dusts. CBL has 1,000 kilolitres of liquid capacity, 1,000 tonnes of granules and 300 tonnes of dusts capacity. During FY08, the average capacity utilisation was around 30%. Around 40% of the IPO proceeds will be invested to set up a small 6,000 tonne per annum bio-diesel plant in Andhra Pradesh, which will need to process 20,000 tonnes of jatropha oil seeds every year.
The company, through its 60% subsidiary Jetro Petro Biotech, has entered into long-term contracts with 179 farmers for growing jatropha plants in their land aggregating 2,000 acres.
Commercial production from this biodiesel plant is expected to commence by September ’09.
As the jatropha cultivation is just a year old in the areas contracted by the company, it may have to source feedstock from the open market for the first few months after it commissions the bio-diesel plant. This may depress the capacity utilisation levels and profitability. Another 40% of the IPO proceeds will be used to fund the company’s working capital needs and the remaining 20% will be used to repay part of its outstanding loans.
FINANCIALS:
For the year ended March ’08, the company’s sales grew 5% to Rs 24.6 crore. Though operating margins gained 220 basis points to 11.5%, a steep jump in interest costs pulled down profit before tax (PBT) growth to 13%. However, a fall in tax provisions helped the company to report 32% growth in net profit.
The company had negative cash flows for the past three years. This led CBL to raise funds via issue of equity capital and loans. In FY06 and FY07, its equity capital jumped nearly 10-fold, while outstanding loans doubled.
VALUATIONS:
The IPO price at Rs 16 is 33.8 times the company’s FY08 earnings based on post-issue equity of Rs 25.92 crore. Small and medium agrochemical companies such as Dhanuka Agritech, Insecticides India, Bhagiradha Chemicals and Bharat Rasayan are trading at P/E multiples of 3-9.
Till CBL’s bio-diesel plant commences production after one year, the company is not expected to report much growth.
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