What you must know about Kronox Lab Sciences IPO?

Kronox Lab Sciences Ltd – About the company

Kronox Lab Sciences Ltd was incorporated in the year 2008 to manufacture and market high-purity speciality fine chemicals. These speciality fine chemicals find applications in diverse end-user industries. The company’s principal product is the High Purity Specialty Fine Chemicals, which find extensive application in the manufacture of APIs (active pharma ingredients), pharmaceutical formulations, scientific research, nutraceuticals, biotech applications, agrochemicals, personal care products, metal refineries, and animal health products. Currently, Kronox Lab Sciences Ltd offers a wide gamut of more than 185 products which, inter alia, include phosphate, sulphate, acetate, chloride, citrate, nitrates, nitrites, carbonate, EDTA derivatives, hydroxide, succinate, gluconate, and others. Apart from a robust India market, the company also exports to more than 20 countries globally. Some of the principal export destinations of Kronox Lab Sciences Ltd include the US, Argentina, Mexico, Australia, Egypt, Spain, Turkey, the UK, Belgium, the UAE, China, and others. Kronox Lab Sciences Ltd is also conducting ongoing R&D on 122 products.

Kronox Lab Sciences Ltd has 3 manufacturing facilities located at Vadodara in Gujarat. The location gives the products of the company easy access to the principal ports of Mundra, Kandla, Hazira, and Nhava Sheva. The company has more than 592 institutional and corporate customers, with nearly one-fourth of them being repeat customers. The company currently employs 212 personnel across various business units. Kronox Lab Sciences Ltd follows Good Manufacturing, laboratory and documentation practices that ensure consistently high-quality results. The company’s state-of-the-art analytical facilities monitor and maintain strict quality control over its products, processes, and services.

The company has also been consistently adhering to national and international quality standards.
The Kronox Lab Sciences IPO is entirely by way of offer for sale (OFS). Hence there is no fresh inflow of funds into the company as a result of the IPO. The OFS will entail the sale of shares by the promoter group to the public, just to enable listing of the company on the bourses. The company was promoted by Joginder Singh Jaswal, Ketan Ramani, and Pritesh Ramani. The promoter holding prior to the IPO stands at 99.98%, which will get diluted to 74.18% post the IPO, on account of promoters diluting their stake via OFS. The IPO will be lead managed by Pantomath Capital Advisors Private Ltd; while KFIN Technologies Ltd will be IPO registrar.

Highlights of the IPO issue of Kronox Lab Sciences Ltd

Here are some of the key highlights to the public issue of Kronox Lab Sciences Ltd.

• The IPO of Kronox Lab Sciences Ltd will be open from June 03rd, 2024 to June 05th, 2024; both days inclusive. The stock of Kronox Lab Sciences Ltd has a face value of ₹10 per share and the price band for the book building IPO has been set in the range of ₹129 to ₹136 per share. 
• The IPO of Kronox Lab Sciences Ltd will purely be an offer for sale (OFS) with no fresh issue component in the IPO. As you would be aware, a fresh issue tends to bring in fresh funds into the company, but is also EPS and equity dilutive. On the other hand, OFS is just a transfer of ownership.
• The offer for sale (OFS) portion of the IPO of Kronox Lab Sciences Ltd comprises the sale / offer of 95,70,000 shares (95.70 lakh shares), which at the upper price band of ₹136 per share will translate into an OFS size of ₹130.15 crore.
• Out of the OFS size of 95.70 lakh shares, 3 promoter shareholders (Joginder Singh Jaswal, Ketan Ramani, and Pritesh Ramani) will offer 31.90 lakh shares each; aggregating to a total OFS size of 95.70 lakh shares. That will constitute the entire IPO size in the case of Kronox Lab Sciences Ltd.
• Since there is no fresh issue portion in the IPO, the offer for sale (OFS) portion will also double up as the total size of the issue. Thus, the total IPO of Kronox Lab Sciences Ltd will comprise of the OFS of 95,70,000 shares (95.70 lakh shares approximately) which at the upper end of the price band of ₹136 per share aggregates to total issue size of ₹130.15 crore.

The IPO of Kronox Lab Sciences Ltd will be listed on the NSE and the BSE on the IPO mainboard.

Kronox Lab Sciences IPO Key Dates

Kronox Lab Sciences IPO opens on Monday, 03rd June 2024 and closes on Wednesday, 05th June 2024. The Kronox Lab Sciences Ltd IPO bid date is from 03rd June 2024 at 10.00 AM to 05th June 2024 at 5.00 PM. The Cut-off time for UPI Mandate confirmation is 5 PM on the issue closing day; which is 05th June 2024.
 

Data Source: Company RHP

It must be noted that in ASBA applications, there is no refund concept. The total application amount is blocked under the ASBA (applications supported by blocked amounts) system. Once the allotment is finalized, only the amount is debited to the extent of the allotment made and the lien on the balance amount is automatically released in the bank account.

The credit of shares to the demat account on June 07th 2024, will be visible to investors under the ISIN Code – (INE0ATZ01017). This allocation to the demat account is only applicable to the extent of the allocation of shares and if no allocations are made in the IPO, then no credit would be visible in the demat account.
Promoter holdings and investor allocation quota

The company was promoted by Joginder Singh Jaswal, Ketan Ramani, and Pritesh Ramani. The promoter holding prior to the IPO stands at 99.98%, which will get diluted to 74.18% post the IPO. As per the terms of the offer, not more than 50% of the net offer is reserved for the qualified institutional buyers (QIBs), while not less than 35% of the net offer size is reserved for the retail investors. The residual 15% is kept aside for the HNI / NII investors. The table below captures the gist of the allocation to various categories.

Data Source: Company RHP

It may be noted here that the Net Offer above refers to the quantity net of employee and promoter quota, as indicated above. There is no employee dedicated quota as communicated by the company as the shares reserved for employees in its red herring prospectus (RHP). The anchor portion has been carved out of the QIB portion and the QIB portion available to the public has therefore been reduced from 50% to 20% of net issue.

Lot sizes for investing in the IPO of Kronox Lab Sciences Ltd

Lot size is the minimum number of shares that the investor has to put in as part of the IPO application. The lot size only applies for the IPO and once it is listed then it can be even traded in multiples of 1 shares since it is a mainboard issue. Investors in the IPO can only invest in minimum lot size and in multiples thereof. In the case of Kronox Lab Sciences Ltd, the minimum lot size is 33 shares with upper band indicative value of ₹14,916. The table below captures the minimum and maximum lots sizes applicable for different categories of investors in the IPO of Kronox Lab Sciences Ltd.
 

It may be noted here that for the B-HNI category and for the QIB (qualified institutional buyer) category, there are no upper limits applicable.

Financial highlights of Kronox Lab Sciences Ltd

The table below captures the key financials of Kronox Lab Sciences Ltd for the last 3 completed financial years. 

Data Source: Company RHP filed with SEBI (FY refers to Apr-Mar period)

There are few key takeaways from the financials of Kronox Lab Sciences Ltd which can be enumerated as under

a) In the last 3 years, revenue growth has been robust with the sales growing over 50% in the last 2 years. The growth has been balanced in the last two years, but what is striking is that the company has reported very healthy net margins of 17.39% for the latest year with the average of the last 3 years also hovering around that level.

b) The net profits have grown have grown by over 70% in the last 2 years and that is evident in the net margins. Also, the return on equity (ROE) at 37.19% and the return on assets (ROA) at 30.75% are very attractive in the latest year. The company has the advantage of being in a specialized segment, where margins tend to be higher.

c) The company has a healthy sweating of assets at around 1.77X in the latest year, although the average of the last 3 years is closer to 1.60X. However, this benefit gets magnified if you consider the robust return on assets at over 30%.
Overall, the company has maintained healthy numbers in terms of growth in top line and bottom line as well as profitability and efficiency margins.

Valuation metrics of the Kronox Lab Sciences Ltd IPO

Let us turn to the valuations part. On the latest year diluted EPS of ₹4.30, the upper band stock price of ₹136 gets discounted at a P/E ratio of 31-32 times. However, this sort of high P/E ratios are normal in the value added products industry and it also has the number to back up in the form of profitability ratios. If you look at the numbers for the first 9 months of FY24, the EPS is already at ₹4.17, so full year EPS can be extrapolated to ₹5.56 per share. It now translates into P/E ratio of 24-25 times, which looks a lot more reasonable.
Here are some qualitative advantages that Kronox Lab Sciences Ltd brings to the table. 

• Kronox Lab Sciences Ltd has a rather wide and specialized product range, catering to a slew of different industries with stringent quality standards. Margins are higher.
• Dur to the long customer approval cycles, it acts as a natural exit and entry barriers for players to foray into the segment and make a dent on the market share.
• The manufacturing plants are in proximity to some of the busiest ports ensuring that inward and outward supply chains work smoothly.

The nature of the value-added speciality chemicals business is one that takes a substantial time to build up but can give geometric returns in the future. Kronox Lab Sciences Ltd has reached that maturity stage from where it can easily leverage its position to boost profits in a big way. That is the story that investors must bet on in the IPO. However, investors in the IPO must be prepared for higher levels of customer and product risk as well as sudden disruptions of the industry. It is best suited to investors who are equipped to wait patiently for more than a year and also willing to assume higher product cycle and customer cycle risk.