Avoid Neogen Chemicals: Choice Broking

Neogen Chemicals Ltd. (NCL), one of India’s leading manufacturers of bromine and lithium chemical compounds, is planning to raise up to Rs. 1,320mn through an IPO, which will open on 24th Apr. and close on 26th Apr. 2019. The price band is Rs. 212 - 215 per share.
•Issue is a combination of fresh and OFS. The company will not receive any proceeds from the OFS part. Of the net proceeds from fresh issue - around Rs. 205mn would be utilized for the prepayment or repayment of certain borrowings availed by the company; Rs. 115mn would be used for the early redemption of fully redeemable cumulative preference shares and around Rs. 200mn would be utilized for meeting the long term working capital requirement. Rest of the funds would be utilized for general corporate purposes.

Valuation and Outlook

Coming to the valuation, based on the higher price band, NCL is demanding a P/E valuation of 47.8x (to its FY18 EPS of Rs. 4.5), which is at a premium to its peer average of 38.8x. Based on FY19E and FY20E EPS, the stock is valued at P/E multiple of 32.2x and 26x, respectively, which again is available at a premium to peer average. However, considering its historical growth profile, proposed expansion activities and the demanded valuations we feel that the issue is fully priced. Thus we assign a “AVOID” rating for the issue. The issue size (around Rs. 1,300mn) being lower than Rs. 2,500mn, the shares will be listed in “T” group, there will be some restrictions on the price movements.

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