[This is a Premium article, unlocked for unrestricted access]
Anupam Rasayan, engaged in the business of custom synthesis and manufacturing of speciality chemicals has come up with its IPO of 760 Cr on March 12th. The company’s products are used in the agro chemical, personal care and pharmaceutical industries.
The Indian chemical industry and companies in this space are in a sweet spot. This is primarily on the back of stricter environmental norms and increase in labour costs in China. In addition, companies world wide are now looking at China+1 strategy to source their supplies.
Where does Anupam Rasayan stand in all of this? Will the company benefit from this transition? We take a look at all of this and see if it makes sense for investors to subscribe to this issue
The Offer
Link to Anupam Rasayan RHP
Issue Size – 1,36,93,693 shares, Off which
Fresh Issue – 100%
Price Band: Rs 553 to 555/share
Offer Value: Rs 760 Cr
Offer for Retail: 35% of the Issue
Outstanding shares post the IPO: 9,99,00,589 shares
Market Lot: 27 Shares/ Rs 14,985
Dates : 12th March – 16th March
Objects of the Issue
The primary objective of the issue is to retire debt to the tune of Rs 564 Cr. Debt outstanding at the end of 31st December, 2020 stood at Rs 841 Cr.
Source: Anupam Rasayan RHP
Promoter Holding
As on the date of the RHP, promoters own 6,53,44,896 shares or 75.8% of the company. Below is the break up of the promoter shareholding
Source: Anupam Rasayan RHP
The other prominent share holder is Mr. Milan Thakkar, non executive director of the company who owns 2 Cr shares. Together the promoters and Mr Thakkar own 99% of the company. Post the issue promoter shareholding will come down from 75.8% to 65.4%.
In the months September-November,2020 equity shares have been issued to the promoters, 80.81 Lakh shares have been issued to KPI LLC. Details of which are shown below
In addition to the above, 88,23,429 series A CCPS and 1,93,01,471 series B CCPS were converted to equity shares in the ratio of 1:1. The conversion rate of these range from Rs 76-122, consideration for these equity shares was paid at the time of issuance of the CCPS between 2016-2019.
Industry
Anupam Rasayan is a manufacturer of speciality chemicals, some of the key features of speciality chemicals are
- Low volume high value products
- Sold on the basis of their quality or utility rather than composition
- Used as additive, ingredient or intermediate that provide a specific attribute to the end product
- Prepared and processed in batches, focus on value addition to the end product
The global speciality market is $ 725 billion, 12% of the global chemical market. Asia Pacific is the major region in the speciality chemical business with a share of 44%.
The global speciality chemical industry can be categorized by mix of application and end user driven segments.
The Indian chemical market is $ 200 billion, basic chemicals or commodity/bulk chemicals constitute 56% of the market. The Indian specialty chemical market is $22 billion and has grown by 10% CAGR in the last 5 years.
The Indian speciality chemical market by application and end user segments is as below
The Indian speciality chemical industry is in a sweet spot, there was tightening in China on chemical companies due to implementation of stricter environmental norms and labour is getting expensive. However what has really pushed customers to look for supplies outside of China in the last year has been the pandemic, while China is the leader in this space and cannot be dislodged from its position easily, many customers are looking at a China +1 strategy, where they look for alternate supplies from other manufacturers across the world.
Currently, China accounts for 17-18% of the world’s exportable specialty chemicals, whereas India accounts for only 1-2%.
Agrochemical Industry Overview
One line of business of Anupam Rasayan is the life science speciality chemical segment, products catering to the agrochemical, personal care and pharmaceuticals industries are sold under this segment. In the agrochemical industry the company caters to the crop protection segment, 72% or Rs 363 of revenues in FY20 were from this segment.
The Indian agrochemical market (crop protection) is $4.2 billion, equally split between domestic and exports. Major geographies where India exports crop protection chemicals are – EMEA, Asia, Latin America and North America.
India was the world’s third largest pesticide exporter by volume in 2018 with a market share of 8%. China leads the market with 27% market share followed by Germany at 8.3%.
India has one of the lowest per capita consumption of crop protection chemicals per hectare. Below is the table showing consumption of crop protection chemicals in India versus other countries.
In terms of segmentation, Insecticides constitute more than 50% of the crop protection chemical market in the country.
Value chain in the agrochemical market
The Company: Anupam Rasayan
Anupam Rasayan was started as a partnership firm in 1984 as a manufacturer of conventional products. It has evolved over the years and is currently one of the leading companies engaged in custom synthesis and manufacturing of speciality chemicals in India.
The company has two business verticals
- Life sciences related speciality chemicals – comprises products catering to the agrochemicals, personal care and pharmaceutical industries
- Other speciality chemicals – comprises of speciality pigment and dyes and polymer additives
In the agrochemical segment it manufacturers agro intermediates and agro active ingredients which are used for manufacturing insecticides, fungicides and herbicides. In the personal care industry it manufactures amongst others anti bacterial and ultra violet protection intermediates and ingredients. In the pharmaceutical industry the company focusses on developing intermediates and key starting material (KSM) for APIs.
95% of the revenues are from the life sciences segment, the agro chemical segment contributes +70% of the revenues of the life sciences segment. Revenues in the agro chemical segment have grown by 33% CAGR in the FY18-20 period as compared to 24% of overall revenues.
Some of the key customers of the company are Syngenta Asia Pacific, Sumitomo chemical company and UPL. For the period ended December,2020 the company manufactured products for over 53 domestic and international customers, including 17 MNCs. Revenues from the top 10 customers for FY20 and 9MFY21 were 86.65% and 84.01% of total revenues.
On the product portfolio front the company has done well from manufacturing 15 products in FY15 to 41 currently. It has 6 manufacturing facilities in Gujarat, 4 located in Sachin and 2 in Bharuch with a installed capacity of 23,438 MT. It has a backward integrated unit in Jhagadia, this helps the company in reducing dependency on imported raw materials.
What is custom synthesis? Does the company have a competitive advantage?
Custom synthesis is a niche segment within contract manufacturing and attracts higher margins compared to contract manufacturing of generic molecules. Custom synthesis needs more R&D when compared to contract research and manufacturing due to patented products manufactured by contract manufacturers.
Due to the nature of the custom synthesis business, companies engaged in this vertical enjoy certain competitive advantages as described below
- Customer approvals take between 12-24 months depending on the product complexity
- Customers avoid sharing product related information with various manufacturers in order to avoid spreading confidential information to lot of manufacturers
- Strictly adhere to technical specifications and maintain quality of the product, provide customers the right to inspect manufacturing facilities for quality checks
As a result of the above the company’s custom synthesis and manufacturing agreements are long term in nature ranging between 2-5 years.
The below chart shows the process of the custom synthesis business
Source: Anupam Rasayan RHP
As for the opportunity size of custom synthesis, the global market was valued at $ 200 billion in 2019 for global speciality chemicals contract manufacturing. The leader in this market is North America with share of 37%, followed by Europe and China with 26% and 15% of the market. Major players involved in this business are Quintiles, Covance, Catalent, Paraxel, Lonza, Charles River Lab and Patheon.
The Indian market for custom synthesis was valued at $11.5 billion in 2019 for specialty chemicals. The Indian market is 6% of the global custom synthesis market. 80% of the speciality chemicals CRAMS market by value are single molecule compounds used across crop protection chemicals and API. These compounds are active ingredients in agrochemical or pharmaceutical formulation.
In terms of end application the pharmaceutical industry contributes to 45% of the CRAMS market followed by agrochemicals with share of 35%. Patented molecules form 25% of the market and the balance are generic molecules.
The key players in the market are
Financial Snapshot
Revenues have grown impressively at 24% CAGR, for 9MFY21 growth has been 45% YOY. This is very impressive feat given the pandemic has effected many industries.
+60% of revenues are from exports, below are the region wise revenues for the last 3 years and 9MFY21
While gross profit growth has been impressive, gross margins have been volatile. One of the reasons for this volatility is that the company revises its prices once a year, so if during the course of the year raw materials prices are volatile the company will not be able to pass them on to the customer.
Key raw materials used include phenol and benzene derivatives, such as para chloro phenol, meta dichloro benzene, bromine, various chloro and fluoro intermediates, solvents and chloro alkalies. Anupam’s dependency on imported RM is 22.44% of its total RM requirement and raw materials that it procures from China is 12%.
Operating margins have been volatile, this is on the back of two factors – gross margin volatility feeding into operating margins and management of fixed costs.
The company has relied on debt to fund its expansion, the debt to equity has been greater than 1 in all of the last 3 years. In the period ended 9MFY21 we do see that the debt/equity ratio is 1, however there has been issuance of shares during the year and that has brought down the ratio.
The business is working capital heavy, for every 1 Re of sales the company requires 56% or 0.56 of working capital. The primary reason for this is inventories, the company stocks inventories for 6 months to negate movement in raw material prices.
The one thing that stands out is the CAPEX that the company has done over the last 3 years. The cumulative investments made by the company are Rs 800 Cr. While it is only in the future that we will know if the investments work out, however given the size of the balance sheet the company has been aggressive in making investments.
On the financial front, there is a lot of scope to improve the financial health of the company.
Our View
The good
The company is in the custom synthesis industry and as we have seen earlier this industry does enjoy certain competitive advantages. Majority of the revenues come from the agro chemical vertical, drivers for this segment are – doubling of farmer’s income, increase in horticulture and floriculture production, increasing food demand, shortage of labour and lower penetration of pesticides in the country.
Anupam also caters to the pharmaceutical industry, though it has negligible revenues from this vertical. The global API market is $ 200 billion and China accounts for producing and exporting 40% of the global supply. The Indian API market is Rs 805 billion, 32% of the domestic demand is imported and 60% of imports are from China. This provides a huge opportunity for companies like Anupam. The recent schemes from the government – bulk drug parks and PLI will also aid the API industry in the country.
The China+1 strategy adopted by lot of companies worldwide will provide lot of opportunities to chemical companies in India.
The not so good
The price band for the IPO is Rs 553-555/share, in the months between September- November of 2020 shares were issued to the promoters at the price of Rs 250/share. Certainly, there is not a sea change in the business for shares to be issued at more than 2X to the public.
Purchase price by customers is pre determined annually, this exposes the company to the volatility in the raw material prices which impacts margins. There is scope for a system where the company reviews prices more frequently and is able to pass on increase in prices to the customers.
There is a lot of scope to improve the financials of the company.
- ROE and ROCE are in higher single digits, one of Anupam’s competitor PI industries has ROE and ROCE’s of 19% and 23%
- Margins are volatile and these need to stabilise and then improved
- Management of working capital. Company stocks inventory for 6 months, this needs to managed efficiently
What matters
While no company is perfect and there are pro’s and con’s to every investment, the most important question is “What are we paying for this company?” So let us look at the valuations
EPS for FY20 was Rs 7, at the price of 555/share the company trades at 79X. Yes, you read it right 79X. PI Industries which clocked revenues of Rs 3,400 Cr in FY20 and is the leader with market share of 10-12% in the custom synthesis agro chemical market trades at 51X. The leader is cheaper and has 6X revenues of Anupam Rasayan. No doubt there are tailwinds for the industry and chemical companies, however in this case the leader is available at a lower multiple than Anupam Rasayan.
While investments cannot be made looking at the PE in isolation, we would like to see improvements in the working capital management, higher ROE’s and ROCE’s and stabilisation of margins to take a second look.
At present given the steep valuations, we feel there is nothing left on the table for investors and would give this issue a pass.
Related readings
Overview of the chemical industry
Outlier in focus: A brief look at SRF
Other recent IPO’s we reviewed
For access to probably the best platform in India for active investors, join Capitalmind Premium. Model Portfolios, Premium Research, and a vibrant member community.
