What you must know about Balaji Speciality Chemicals IPO?

Balaji Speciality Chemicals Ltd, was incorporated in the year 2010 as a subsidiary of Balaji Amines Limited, which is already a listed company on the NSE and BSE. Balaji Speciality Chemicals Ltd  manufactures methylamines, ethylamine, derivatives of specialty chemicals, and pharma excipients. The company also makes niche chemicals like Ethylenediamine, Piperazine (Anhydrous), Diethylenetriamine, Amino Ethyl Ethanol Amines, and Amino Ethyl Piperazine, using the Mono-ethanol Amine (MEA) process. These chemicals are critical as they are import substitutes and find applications in end user industries like specialty chemicals, agrochemicals, and pharmaceuticals. Its manufacturing unit is located in Solapur in Maharashtra and has an aggregate installed capacity of 30,000 MT per annum (MTPA).

Balaji Speciality Chemicals Ltd sells its products to over 180 customers in India and across the globe. Some of its premier customers include Nanjing Union Chemicals, UPL, Reddy Labs and Aarti Drugs. Its clients are spread across various countries including China, US, Germany, Malaysia, Belgium, Kuwait, Korea, UK, Turkey, UAE, and Italy; apart from a very strong domestic market. The issue of Balaji Speciality Chemicals will be lead managed by HDFC Bank Ltd and JM Financial. Link Intime India Private Ltd will be the registrars to the issue.

Highlights of the IPO issue of Balaji Speciality Chemicals Ltd

The size of the issue is not yet known, but the number of shares to be sold is already known since the price band for the IPO of Balaji Speciality Chemicals Ltd is yet to be fixed. What we know, as per the Red Herring Prospectus (RHP) is that the IPO will be a combination of a fresh issue and an offer for sale by early investors. The fresh issue portion will be to the tune of ₹250 crore while the offer for sale portion will entail the sale of 2,60,00,000 (2.6 crore) shares). The price is yet to be fixed and so we do not know the number of shares to be issued as part of the fresh issue or the total size of the OFS and the overall IPO.

An offer for sale does not result in fresh funds coming into the company. However, it leads to change in ownership and increase in free float of the company, resulting in currency value barometers emerging via a stock exchange listing. The new issue brings in fresh cash into the company, but it is also eps dilutive and capital dilutive for the company. The promoters currently hold 97.98% stake in the company and once the price is decided, we will get to know the total equity dilution of the promoters post the combination of fresh issue and offer for sale.

Allotment quotas for different categories in the IPO

As per the terms of the offer, 50% of the net offer is reserved for the qualified institutional buyers (QIBs), while 35% of the total issue size is reserved for the retail investors. The residual 15% is kept aside for the HNI / NII investors . The table below captures the quotas.

The company has a face value of ₹2 per share and post the IPO, the stock of Balaji Speciality Chemicals Ltd will be listed on the NSE and on the BSE. Being a combination of a fresh issue and an offer for sale, the IPO will result in dilution of equity and EPS as well as transfer of promoter equity to public shareholders, thus increasing the free float.

Key dates for Balaji Speciality Chemicals Ltd IPO and how to apply?

The issue opens for subscription on 18th August 2023 and closes for subscription on 22nd August 2023 (both days inclusive). The basis of allotment will be finalized on 25th August 2023 and the refunds will be initiated on 28th August 2023. In addition, the demat credits are expected to happen on 29th August 2023 and the stock will list on 30th August 2023 on the NSE and the BSE. Balaji Speciality Chemicals Ltd is currently a subsidiary of Balaji Amines which is an established listed specialty chemical company in India. Let us now turn to the more practical issue of how to apply for the IPO of Balaji Speciality Chemicals Ltd.

Investors can apply either through their existing trading account or the ASBA application can be directly logged through the internet banking account. This can only be done through the authorized list of self-certified syndicate banks (SCSB). In an ASBA application, the requisite amount is only blocked at the time of application and the necessary amount is debited only on allotment. Investors can apply in the retail quote (up to ₹2 lakh per application) or in the HNI / NII quota (above ₹2 lakh). Minimum lot sizes will be known after pricing. It must be noted that the anchor allocation will happen on 02nd August, 2023; a day before the IPO opens for subscription to the public. Anchor allocation will be deducted from QIB portion.

Financial highlights of Balaji Speciality Chemicals Ltd

The table below captures the key financials of Balaji Speciality Chemicals Ltd for the last 3 completed financial years.

Data Source: Company RHP filed with SEBI

There are few key takeaways from the financials of Balaji Speciality Chemicals Ltd which can be enumerated as under

1. In the last 2 years, the revenues have grown phenomenally (it has almost grown four-fold). It is not just that net profits have grown at a faster rate but the profit related margins are also very impressive. PAT margins are consistently above 20% and the ROE is in the range of 50%. That should help support higher valuations in the market.
    
2. The company is currently having a weighted average EPS of ₹2.76 over the last 3 years and higher end specialty chemicals command valuations of around 50X to 60X. With its impressive business model and more impressive financial ratios in the last 3 years, getting higher valuations may not be a problem.
    
3. As the pricing is awaited, one thing that stands out is the sharp turnaround in the asset turnover ratio or the asset sweating ratio. That has grown from just about 0.58 to 1.66 over the last 2 years and promises a big boost to the ROE.

The roster of investors is extremely impressive, but that must not be the only reason to buy into this IPO. It has a strong business model and the support of a well-established parent company. One has to await the price fixation since only then we would know how much is in the price and how much is on the table for investors. Balaji Speciality Chemicals Ltd is best suited to investors with a longer time perspective and a higher risk appetite. Speciality chemicals still tends to be a business model that is vulnerable to the China factor.