Chemcon Speciality Chemicals IPO opens: What do the brokerages say


NEW DELHI: The Rs 318 crore initial public offer (IPO) of Chemcon Speciality Chemicals, which serves pharma and oil well industries, opened for subscription on Monday. The Vadodara-based company is offering a fresh issue of equity shares, aggregating up to Rs 165 crore and offer for sale of up to 45,00,000 equity shares, to be sold in the Rs 338-340 price band.

On Friday, the company raised Rs 95.40 crore through allotment of 28.06 lakh shares to anchor investors at Rs 340 per share. Analysts said the issue is demanding an inexpensive valuation of 25.5 times FY20 earnings per share and the company could gain from a shift in demand from China. But high client concentration, criminal proceeding against a promoter and limited portfolio are key risks to the company.

Sagar Shah of Ascent Wealth Advisers, an entity that deals in unlisted shares, said Chemcon’s premium in the grey market had risen to Rs 275 by Sunday evening from Rs 255 earlier.

Here’s what brokerages said on the issue:

Motilal Oswal Securities: Subscribe
The brokerage likes the company’s leadership position in niche products, the high entry barriers in the speciality chemicals industry and healthy financials. “Further, considering the bright prospects for chemicals companies due to shift of supply chain away from China, we believe Chemcon would be well placed to capture this with its planned capex,” it said.

The brokerage said high client concentration, limited product portfolio and criminal proceeding against a member of the promoter group are key risks for the stock.

Angel Broking: Subscribe
The brokerage noted that the specialty chemicals peers such as Neogen Chemicals (57 times), Paushak (37.6 times), Atul (29.6 times) and Aarti Industries (35.6 times ) are trading in the 35-57 times range on FY20 EPS.

The company’s return ratios and margins are better than most of its peers, it said and suggested that the company is undervalued compared with its peers and “a lot of value is left on the table.”

“As we are positive on the future outlook for the industry as well as the company, we would recommend to ‘subscribe’ rating issue for long term as well as for listing gains,” it said.

Choice Broking: Subscribe with caution

Choice Broking also finds Chemcon’s IPO valued at a P/E multiple of 25.5 times at a discount to the peer average of 40 times. It said the company’s fundamentals look positive, but the promoter and promoter group’s corporate governance issue is making it cautious.

The management has indicated that the company will not be impacted by any means if the outcome of the appeal is not favourable. “Also, the specialty chemicals sector got re-rated in the last 5-6 months. Before re-rating, the peers were available at lower valuations. Thus, considering the above observations, we assign a ‘Subscribe with Caution’ rating for the issue,” it said.

Hem Securities: Subscribe

Astha Jain of Hem Securities has a ‘subscribe’ rating on the issue as she believes that the company has shown consistent performance and has a strong financial position. “Also, the specialty chemicals industry in which company operate has high entry barriers. Therefore, we recommend a ‘subscribe’ rating on the issue both for short and long term horizon,” She said.

Geojit Financial Services: Subscribe

This brokerage said at the upper end of the price band, the stock looks attractive compared with its peers. It noted that the company’s revenue and PAT over FY18-20 grew at a healthy compounded annual growth rate (CAGR) of 29 per cent and 36 per cent, respectively. The company, it said, has a healthy balance sheet with stable cash flows. Its net debt was Rs 44 crore with a debt-to-equity ratio of 0.3 in FY20.

“It is well-positioned to substitute the imports from China and has an opportunity to grow total revenue at a CAGR of more than 25 per cent over FY19-FY23. Considering healthy business performance, regular capacity expansions, strong customer base, expanding margin profile and improving outlook for the sector, we have a ‘subscribe’ rating on this IPO,” it said.

Arihant Capital: Subscribe

This brokerage finds the IPO valuations inexpensive. With the company in the manufacturing of speciality chemicals, its vast potential to cater to the domestic market, rising neo-nationalism against Chinese imports and the government push for self-sufficiency in API supplies, make Arihant go bullish on the issue. The company, it said, is recognising the opportunity it has in hand and is expanding its operations.

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