Investors may wait for clear biz trends in Chemcon | Economic Times

ET Intelligence Group: Investors may consider investment in Chemcon Speciality Chemicals following the listing in the secondary markets after spotting a definite trend in its financial performance and management’s ability to navigate operational and other challenges to its business.The Vadodara-based company plans to raise ₹318 crore from the initial public offering (IPO), out of which ₹153 crore is an offer for sale by the founders and the rest is a fresh issuance of shares, mainly for capacity expansion. The issue may draw investors as it is a beneficiary of import substitution theme, coupled with a superior risk-return ratio than its peers and valuation discount to the sector average. However, a couple of cases against promoters dilute the composite score. Business Model: Chemcon supplies chemical intermediates to leading pharma companies such as Hetero, Laurus Labs, Aurobindo, Ind-Swift. It also supplies oil well completion chemicals to Water System and CG Gram. The pharma intermediate segment contributes two-thirds of the total revenue and the rest comes from oil well chemicals. A bulk of the revenue of the pharma segment comes from HMDS, a drug for making penicillin derivatives, and CMIC, an intermediate for anti-AIDS and anti-hepatitis B drug tenofovir. It is India’s largest manufacturer of HMDS and CMIC, and among the top three in the world.Strength: Chemcon is expanding its capacity for HMDS, at a time when India is planning to lower its import reliance on several products from China. The penicillin derivative amoxicillin combined with azithromycin is widely used for the treatment of Covid-19. Besides, it has set up a new plant of 600 MT for high purity HMDS. Risk Factors: The company’s promoters have filed an application for settlement with Sebi for certain past non-compliances about their holdings in a listed company, Overseas Synthetics. This could have an adverse impact on operations, reputation and prospects. Besides, Naresh Goyal, a promoter of the company, was convicted and sentenced by the CBI special court in December 2018 in his capacity as a director of Super Scientific Works, which subsequently filed an appeal in Rajasthan High Court.78223802Financials: The company’s revenue rose 28% annually to ₹262 crore between FY18 and FY20, while profits rose 36% to ₹48 crore. Its operating profit margin, at 27%, falls midway between the lower and upper band of its peers, while it enjoys among the highest returns on equity.Valuation: At the upper band of ₹340, the asking price-earnings multiple will be 22 times of FY20 earnings. This is about 40% lower than the industry average.