Chemplast Sanmar - IPO Research Note

Chemplast Sanmar, a specialty chemicals manufacturer, has been in existence for last 36 years. The company is in the limelight with the global focus shifting towards India as a focal point for specialty chemicals due to export curbs in China. Globally renowned PE investor, Prem Watsa, has a stake in Chemplast Sanmar via Fairfax Holdings. 

Chemplast has a diversified specialty chemicals portfolio. The focus is largely on specialty paste PVC resin and custom manufacturing intermediates for pharma and agrochemicals. Chemplast is the dominant manufacturer of specialty paste PVC resin, with the only Indian competitor being Finolex Industries. Chemplast Sanmar is the largest producer of Hydrogen Peroxide and the third largest producer of caustic soda in South India. Chemplast is India’s oldest manufacturers of chloromethanes. Its manufacturing capacity is spread across 4 units, with 3 in Tamil Nadu and 1 in Puducherry. 

Chemplast Sanmar IPO Details
 

_{Data Source: IPO Filings}

Some of the advantages in the business model of Chemplast are as under.
•    A vertically integrated business model makes it cost effective
•    Leadership in specialty paste PVC resin, caustic soda and hydrogen peroxide
•    Revenue growth of 200% in the last one year
•    EBITDA on rising trend and above 29% in FY21
•    High entry barriers and limited competition in niche segments
•    Custom manufacturing growing at 12% and projected to sustain in future

A quick look at the financials of Chemplast Sanmar

The company took a hit due to the pandemic last year. However, operations have resumed and the manufacturing capacity utilization is back at peak levels. In FY21, Chemplast Sanmar increased its utilization of the hydrogen peroxide capacity from 21% to 42% while other products have been stable to lower. 
 

_{Data Source: Company RHP}

The profits and revenues got a boost in the latest fiscal, from revival of production and from inorganic growth. The negative net worth is due to the absorption of losses post the CCVL acquisition. Hence, RONW is not exactly comparable on sequential basis. 

The fresh issue of Rs.1,300 crore will entirely be used for early redemption of NCDs worth Rs.1,238 crore, which will reduce the leverage and improve coverage ratios of the company. However, one area to observe is the sharp reduction in promoter stake from 100% to 55%.

Investment Perspective for Chemplast Sanmar

The company surely finds itself in the right place at the right time. With a vertically integrated model and leadership in most chemicals, the company is poised to benefit from the global boom in demand for specialty chemicals.

a)    Realization per tonne in terms of revenues, in its two core chemicals of specialty paste PVR resin and suspension PVC resin, increased over the last 3 years while the realization has been falling for other chemicals during the same period.

b)    Currently, 45% of India’s demand for specialty paste PVC resins is met through imports. That leaves a huge market opportunity for Chemplast, with its virtual leadership position in specialty paste PVC resins. Custom manufacturing is growing at 12%, with India’s skilled workforce at low rates.

c)    Another key product where there is a huge 50% demand-supply gap in India is suspension PVC resin. With low per capita consumption and big growth in user industries like irrigation and urban infrastructure, this is a big opportunity.

d)    The vertically integrated model gives Chemplast better control over costs and reduces reliance on external suppliers. In situations like today, it helps them to keep input prices in check and protect margins.

e)    The IPO price discounts the latest year earnings at around 17.7X, which is lower than the peer group. However, the company must show evidence of sustaining profits in the coming years with lower volatility.

IPO Investors can look at Chemplast Sanmar as a play on the fast growing specialty chemicals space. The vertically integrated model and reasonable valuations are an added advantage. However, the sharp lowering of promoter stake may be a red flag for investors.