Subscribe to Gwalior Chemical IPO: Angel

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Gwalior Chemical Industries, GCIL, a producer of niche chemical products for agro-chemicals, pharmaceuticals, dye, flavour and fragrance industries, is open for subscription with an initial public offering, IPO of equity shares aggregating to Rs 80 crore (Rs 800 million) through a 100% book build process.

The price band for the offer has been fixed between Rs 71 and Rs 85 per share. The issue closes on September 14, 2006.

The equity shares are proposed to be listed on BSE and NSE.

JM Morgan Stanley Private Limited is the sole book running lead manager to the issue.

The Angel Broking report on Gwalior Chemical Industries IPO:

Recommendation - Subscribe

At higher price band of Rs 85, GCIL is available at 10.8x FY2007E EPS of Rs 7.8. GCIL's product offerings rank among the specialty chemical companies like Ciba, Clarient etc. Given the visibility in earnings and GCIL's focus on exports, we recommend subscribe to the IPO.

Objects of the issue

Projects Project cost	(Rs Cr)
Expansion, upgradation and de-bottlenecking of facilities at Nagda	31.75
Setting up new plants at Nagda and Ankleshwar for development of new products	16.35
Acquisition of land, setting up of new laboratories and storage tanks	16.00
Working capital requirements	20.00
Issue expenses	6.00
Total	90.10

 

 

 

 

 

 

The total project cost will be financed through

IPO	80.00
Internal accruals	10.10
Total	90.10

 

 

 

Company overview

Gwalior Chemical Industries, GCIL caters to the agrochemical, pharmaceutical, dye, flavours and fragrance industries by offering niche products. It is one of the top producers of chlorotoluenes and thionyl chloride in the world. GCIL offers a basket of specialty chemicals of international standards to its domestic as well as international customers.

Investment positives

Diversified product basket

GCIL has a wide portfolio of products in the pharmaceutical, agro-chemical, dye, flavour and fragrance segments. The company has global size plants with the latest technology, which helps it deliver high-quality products on time. Certain specialty products earn high margins for GCIL due to their critical nature. In the past three years, GCIL has been successful in receiving repeat orders from 90% of its domestic clients and 80% of their international clients.

Integrated facility and proximity to raw material (chlorine)

To achieve economies of scale, the company has created large and integrated facilities, which has resulted in lower cost of production and increased market share. Most of the plants are continuous process plants, which gives the company a competitive edge over its peers who have batch process. GCIL has set up a dedicated pipeline for the transportation of chlorine from the chloro-alkali plant of Grasim Industries in Nagda, Madhya Pradesh. Chlorine is one of the important raw materials for the company and the pipeline helps to make it a cost-effective method.

Continuous focus on research & development

High emphasis on R&D has led GCIL to devise its own process technologies and expand its engineering capabilities. The company has set up an in-house research and development on process chemistry by setting up pilot plants. GCIL is developing and has developed new processes and technologies in consultation with the University Institute of Chemical Technology (UICT), Mumbai.

Forward integration

After gaining a strong foothold in basic chemicals like benzyl chloride, benzaldehyde and thionyl chloride, GCIL has put forth its strategy to manufacture downstream products. The forward integration plans of the company are at various stages of implementation and commercial production is expected to start by Q3FY2007.

Focusing on large international market

Quality and timely delivery are the success factors to mark its presence in the international market. The company has made efforts to create world-class facilities to cater to the meticulous quality requirements of its global customers. GCIL is eyeing Europe, US, East Asia and Japan where the demand is strong for GCIL's products. The planned investments would help GCIL expand its international presence along with increasing its export revenues.

New product offerings for domestic market

Currently, GCIL caters to the domestic market through a network of agents located at 9 different locations. Post completing its expansion plans, GCIL plans to introduce new products in the domestic market at competitive prices to expand its domestic reach.

Concerns

• Chlorine and Toulene comprise 50% of the raw material. Any price fluctuation and availability could hamper the company's operating margins.
• Currently the entire steam requirement for its Nagda facility is met by Grasim. Disruption in supply would hamper the plant operations severely.

Financial performance

In FY2006, GCIL clocked a 25.5% YoY growth in revenues to Rs 171 crore and 21.9% to Rs 15.6 crore PAT. Operating margins YoY improved to 21% (20.4%). For 1QFY2007, GCIL clocked revenues of Rs 48.6 crore and PAT of Rs 4.4 crore. In Q1FY2007, Operating margins YoY improved to 20.4% (18.7%). Our quick estimates for FY2007 show that the revenues are expected to grow at 21% to Rs 206.5 crore and PAT would be Rs 19 crore.