Chemplast Sanmar IPO opens today: Should you subscribe?

“On the upper price band of Rs 541 and EPS of Rs 30.6 for FY21, the P/E multiple works out to be 17.6x, which is at a significant discount compared to the industry average of around 31x,” KRChoksey Research said.

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A healthy market share, limited opportunities for new entrants and stringent performance requirements by its customers offer a positive outlook for Chemplast Sanmar in the medium term, the brokerage said. Based on a strong business model with long-tenured customer relations and a discounted valuation compared to its peers, the brokerage recommended a ‘subscribe’ rating for listing gains.

However, developments related to pledged shares and the viability of its fundamental performance should be monitored in the near term, KRChoksey said. The entire share capital of subsidiary Chemplast Cuddalore Vinyls Ltd. (CCVL) is held by Chemplast Sanmar and pledged in favour of HDFC.

Marwadi Financial Services assigned a ‘subscribe’ rating for the Chemplast Sanmar IPO, although with caution.

“The company is well-positioned to capture favourable industry dynamics. However, the negative net asset value, along with higher trade payable days, keeps us cautious from a longer-term perspective,” according to the brokerage.

Chemplast Sanmar enjoys a healthy market share in India across various products. Its focus is on specialty paste PVC resin and custom manufacturing of starting materials and intermediates for the pharmaceutical, agro-chemical and fine chemicals sectors.

“A leading manufacturer of suspension PVC resin and specialty PVC resin, with limited competition and rising industry demand provides positive outlook for its business growth in the medium term,” KRChoksey said.

The company is one of India’s leading manufacturers of specialty paste PVC resin by installed production capacity, as of December 31, 2020. It is the third-largest manufacturer of caustic soda and the largest producer of hydrogen peroxide in south India by installed production capacity. It is one of the oldest manufacturers in the chloromethanes market in India.

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The company has four manufacturing facilities – three in Mettur, Berigai and Cuddalore in Tamil Nadu and one at Karaikal in Puducherry.

The SHL Chemicals Group is a constituent of the Sanmar Group, which is among the most prominent corporate groups in south India. Fairfax India Holdings Corporation, led by international investor Prem Watsa, has invested in the SHL Chemicals Group since 2016 through FIH Mauritius Investments.

Angel Broking has a ‘neutral’ recommendation on the IPO given its concerns over high debt and negative net worth, though it believes that India’s specialty chemical industry will be one of the biggest beneficiaries of the shift in supply chains after the pandemic.

Company borrowings increased to Rs 2,024.5 crore in FY21 from Rs 1,254.4 crore in FY20 and Rs 192.7 crore in FY19. As a result, finance costs jumped to Rs 433.4 crore in FY21 from Rs 95.5 crore in FY20 and Rs 48.3 crore in FY19.

Delisting Issue

Chemplast Sanmar had delisted from the stock exchanges in June 2012 due to weak financial conditions and high debt levels. This may create a sentimental impact but is unlikely to affect subscription and listing, experts said.

“Yes, it will have a sentimental impact on the IPO process,” said Prashanth Tapse, VP research, at Mehta Equities.

Astha Jain, a senior research analyst at Hem Securities, said the delisting issue may create a sentimental impact, but ultimately the IPO will list on the basis of the company’s fundamentals.

“We don’t feel that this delisting issue will have a material impact on listing,” Jain said.

Rajnath Yadav, a research analyst at Choice Broking, agreed with Jain and said the issue may be subscribed.

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“Listing gains are not the only criteria for our recommendation. The company has a diversified product portfolio with a healthy growth outlook. One of the key concerns is the share-pledging of the lossmaking subsidiary. Nevertheless, we have a ‘subscribe for long term’ rating for the issue,” Yadav said.

Chemplast Sanmar delisted in 2012 following the global financial crisis and subsequent fluctuations in crude oil prices and elevated debt, which adversely affected its business during FY09-12. The delisting gave the management the flexibility to restructure the business and address the capital structure. The restructuring strengthened the company’s operations and it remerged with the acquisition of CCVL on March 31, 2021.

With this, Chemplast Sanmar’s revenue jumped to Rs 3,798.7 crore in FY21 from Rs 1,257.7 crore in FY20 and profit increased to Rs 410.2 crore from Rs 46.1 crore.

“It has witnessed healthy EBITDA margins in the range of 24-26 percent over the last three years (FY19-21),” KRChoksey said.

Chemplast Sanmar shares traded at a premium of Rs 25-35 in the grey market, IPO Watch and IPO Central data showed. This translated into trades at Rs 566-576, which is 4.6-6.5 percent higher than the issue price of Rs 541, the higher end of the price band.

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