Incorporated in 1989 by Haridas Kanani, Neogen Chemicals (NC) is one of India's leading manufacturers of bromine and lithium-based specialty chemicals. The product offerings comprise specialty organic bromine-based chemical compounds and other specialty organic chemical compounds as well as specialty inorganic lithium-based chemicals compounds and comprises of pharmaceutical intermediates, agrochemical intermediates, engineering fluids, electronic chemicals, polymers additives, water treatment chemicals, construction chemicals and flavours and fragrances and are widely used for specialised applications to meet industry-specific requirements and can be classified based on application industries
The company also undertakes custom synthesis and contract manufacturing which has further enabled the company to increase its bouquet of product offerings.
The company's manufacturing facilities are located in Mahape, Navi Mumbai in Maharashtra and Karakhadi, Vadodara in Gujarat and are spread across around 40 acres with an additional 12 acres in Dahej SEZ. The manufacturing units at Vadodara and Mahape also contain research and development units
Over the past 25 years, NG has established a customer base of 1,363 customers, of which around 1237 are domestic customers and rest 126 are international customers across various application industries such as pharmaceutical, agrochemical, aroma chemical, electronic-chemical, specialty polymer, construction chemical and Vapor Absorption Machines (VAM) original equipment manufacturers. Key customers include names such as Austin Chemical Company Inc., US, CBC Co., Japan, Divi's Laboratories., Laurus Labs, Solvay Specialties India Pvt Ltd, Thermax and Voltas.
Top 10 customers account for around 44.5% of total revenues in FY 2018 and 60.2% in the nine months ended December 2018.
Over the last 10 years, around 252 customers have contributed on an average of 92.7% to the revenues from operations and 69 new customers have contributed on an average of 7.3% to the revenues from operations every year.
The company exports its products to 27 countries including Europe, USA, Middle East, Australia, China, Canada, Egypt, Taiwan and Japan. Of the total sales of FY 2018, around 62.3% was from domestic market and rest 37.7% from exports. Of the exports, around 8.9% was from the US, 8.3% is from the EU, 2.4% from Japan and rest from other countries.
In FY 2018, around 64.8% of the total revenues came from organic compounds comprising bromine compounds and non-bromine speciality chemical compounds and grignard reagents. The remaining 35.2% of the total revenues came from inorganic compounds comprising lithium compounds and inorganic speciality chemical compounds. From FY 2018, the company is undertaking custom synthesis (CS) and contract manufacturing (CM) of a few specialty chemicals for multinational companies based in Europe, Israel, China and Japan. Revenues from CS and CM accounted for around 2.4% of total revenues in FY 2018 and 9.3% of the total revenues in the nine months ended FY 2019 and form part of revenues from organic compounds.
On end-user basis, in FY 2018, around 65.2% of the total sales were from the pharmaceutical segment, 14.4% from engineering, 9.7% from agro chemicals and rest 10.7% from various other segments.
The existing Mahape facility has capacity to manufacture 45,000 litres of organic glass line reactors and 12 lakh kg per annum of inorganic glass line reactors. The Vadodara facility has capacity to manufacture 85400 litres of organic glass line reactors. The company aims to expand further its Vadodara facility and add another 1.26 lakh litres of glass line reactors. Post the expansion, the company still will have 32 acres of land available for further expansion. The company also aims to develop a green-field manufacturing unit in Dahej SEZ, with capacity of 12 lakh kg per annum of inorganic lines to cater to the anticipated increased demand for lithium compounds. Post the expansion in Dahej, the company will have nine acres of land available for further expansion.
The Offer and the Objects
The offer comprises offer for sale by the existing shareholders of 29 lakh shares. At the lower price band of Rs 212 per share, the size works out to Rs 61.48 crore. At the higher price band of Rs 215 per share, the size works out to Rs 62.35 crore.
The offer also comprises fresh issue of Rs 70 crore. At the lower price of Rs 212 per share, the size works out to 33.02 lakh shares. At the higher price of Rs 215 per share works out to 32.56 lakh shares.
The minimum bid lot is 65 equity shares and in multiples of 65 equity shares.
The objects of the issue to fund the working capital requirements of Rs 20 crore and towards repayment of certain borrowings of Rs 20.5 crore availed, early redemption of 9.8% fully redeemable cumulative preference shares totalling Rs 11.50 core and rest for general corporate purpose apart from providing the benefits of listing the equity shares on the BSE and the NSE and to enhance its visibility and brand image and provide liquidity to its existing shareholders.
The offer for sale comprises the shares of promoters Haridas Kanani (16.99 lakh shares) and Beena Kanani (12 lakh shares).
Post issue, the promoters and group will hold 70% in the company.
Strengths
Has a large and diverse array of products. From four products in 1989, the company was now manufacturing an aggregate of 198 products by February 2019. The product bouquet comprises 131 bromine compounds, 10 lithium compounds, 32 non-bromine specialty chemical compounds comprising 25 organic specialty chemical compounds and 25 types of Grignard reagents. The diversified product range enables the company to cater to diverse customers across a wide array of user industries and customers, thereby mitigating the risks emanating from customer, industry and geographic concentration.
Products are used for specialty applications to manufacture high value proprietary and specialised products.
A consistent track record of business growth over the years and repeated business from existing customers has enabled long-standing relationships with suppliers. The relationship with large producers of bromine source and lithium source spans over a decade. Based on the relationship with the suppliers, the company is able to enter into annual contracts, thereby offering stability in pricing to their customers.
Exports accounted for 53% of total revenues in the nine months ended December 2018. It expects to derive the benefits of the general decline in manufacturing of specialty chemicals in China due to environment issues.
The focus is on advanced speciality intermediates. Such a forward integration offers higher value addition and higher margins.
There is continued investment in manufacturing facilities. The planned expansion will almost double the organic and inorganic manufacturing facilities, resulting in better economies of scale and further diversified product offerings and higher exports.
Weaknesses
The company enters annual contract for raw materials bromine source, lithium source and inorganic acids. There is no assurance about the price and availability of the raw materials on the expiry of contracts. It can lead to volatility in pricing and can disrupt the margins.
60.2% of the total revenues came from 10 customers in the nine months and 44.5% in FY 2018. Also, the top 2 customers accounted for 31% of the total revenues in the nine months and 15.6% in FY 2018.
Cash flows from operating activities were negative in the nine months ended December 2018. Also, cash flow generation has been fluctuating over the last few years.
The manufacturing process involves the use of hazardous and flammable industrial chemicals. Any change in environmental laws and regulations including enhanced compliance and quality requirements can lead to increase in the cost of operations or disruptions.
Any change in law and regulations in China for local manufacturing, which otherwise has helped, and in India for speciality chemical industries, can lead to China regaining the lost ground in export markets. Thus, India and the company stand to lose on exports and face higher imports.
It is exposed to forex volatility.
Consolidated debt including preference share capital stood at Rs 122.46 crore and the debt-equity ratio at 2.4:1 end December 2018.
Valuation
Consolidated net sales were up 35% to Rs 164.01 crore and the OPM stood at 17.7% in FY 2018 compared with 16.5% in FY 2017, resulting in OP growth of 45% to Rs 28.99 crore. Other income stood at Rs 0.66 crore, up 115%. Interest cost increased 39% to Rs 10.42 crore, while depreciation spurted 48% to Rs 1.94 crore. Thus, PBT jumped 51% to Rs 17.30 crore. After providing for total tax of Rs 6.84 crore, up 79%, and share of profit of associates of Rs 0.04 crore, Pat climbed up 37% to Rs 10.5 crore.
Consolidated net sales were Rs 159.23 crore, with the OPM of 17% leading to OP of Rs 27.13 crore in the nine months ended December 2018. With other income at Rs 0.46 crore, interest cost at Rs 8.56 crore and depreciation at Rs 2.11 crore, PBT stood at Rs 16.92 crore. After providing for total tax of Rs 4.83 crore and share of associates of Rs 0.13 crore, Pat stood at Rs 12.22 crore. Profit cannot be annualised due to the seasonality in business.
At the higher price band of Rs 215, the offer is made at around 53.8 times its FY 2018 consolidated EPS (net of preference dividend) of Rs 4 on a post-issue equity share capital of Rs 23.34 crore of face value of Rs 10 each.
Aarti Industries, Navin Flourine International (Navin) and Paushak are some of the listed companies in similar line of business.
Net sales of Aarti Industries stood at Rs 3699.3 crore and Pat at Rs 316.44 crore in FY 2018, giving an EPS of Rs 38.9 for FY 2018. At the current market price of Rs 1625, Aarti Industries trades at around 41.8 times its FY 2018 earnings.
Net sales of Navin Flourine stood at Rs 886.05 crore and Pat at Rs 178.96 crore in FY 2018, giving an EPS of Rs 36.3 for FY 2018. At the current market price of Rs 765, Navin trades at 19.6 times its FY 2018 earnings.
Consolidated net sales of Paushak stood at Rs 104.75 crore and Pat at Rs 21.47 crore in FY 2018, giving an EPS of Rs 67 for FY 2018. At the current market price of Rs 2200, the company trades at 32.8 times its FY 2018 earnings.
| Neogen Chemicals: Issue highlights |
| Offer for sale ( in Rs crore) | |
| - On lower price band | 61.48 |
| - On upper price band | 62.35 |
| Total Issue size for offer for sale ( in no of shares in lakh) | 29.00 |
| Fresh Issue ( in No of shares in lakh) | |
| - On lower price band | 33.02 |
| - On upper price band | 32.56 |
| Total Issue size for fresh issue ( in Rs crore) | 70.00 |
| Price Band (Rs) | 212-215 |
| Bid size ( in no of shares) | 65 |
| Post issue share capital (Rs crore) | 23.34 |
| Post-issue Promoter & Group shareholding (%) | 70.0% |
| Issue open date | 24-04-2019 |
| Issue closed date | 26-04-2019 |
| Listing | BSE, NSE |
| Rating | 38/100 |
| Neogen Chemicals: Consolidated Financials |
| 1403(12) | 1503(12) | 1603(12) | 1703(12) | 1803(12) | 1812(09) |
| Net Sales | 79.90 | 91.48 | 108.89 | 121.47 | 164.01 | 159.23 |
| OPM (%) | 14.4% | 13.8% | 13.0% | 16.5% | 17.7% | 17.0% |
| OP | 11.48 | 12.66 | 14.11 | 19.99 | 28.99 | 27.13 |
| Other in. | 0.41 | 1.00 | 0.16 | 0.31 | 0.66 | 0.46 |
| PBDIT | 11.89 | 13.65 | 14.27 | 20.30 | 29.65 | 27.59 |
| Interest | 4.78 | 4.65 | 4.79 | 7.52 | 10.42 | 8.56 |
| PBDT | 7.11 | 9.00 | 9.48 | 12.78 | 19.24 | 19.03 |
| Dep. | 0.92 | 0.94 | 1.00 | 1.31 | 1.94 | 2.11 |
| PBT | 6.19 | 8.07 | 8.48 | 11.47 | 17.30 | 16.92 |
| EO | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| PBT after EO | 6.19 | 8.07 | 8.48 | 11.47 | 17.30 | 16.92 |
| Tax (including Deferred Tax) | 2.55 | 2.98 | 3.30 | 3.82 | 6.84 | 4.83 |
| PAT | 3.64 | 5.09 | 5.18 | 7.65 | 10.46 | 12.09 |
| Share of Associates | 0.00 | 0.00 | 0.00 | 0.04 | 0.04 | 0.13 |
| Dividend to Preference shares | 0.00 | 0.00 | 0.13 | 0.38 | 1.18 | 0.07 |
| PAT after Dividend to Preference Shares and Share of Associates | 3.64 | 5.09 | 5.05 | 7.30 | 9.32 | 12.16 |
| EPS (Rs)* | 1.6 | 2.2 | 2.2 | 3.1 | 4.0 | # |
*EPS is on post issue equity capital of Rs 23.34 crore of face value of Rs 10 each
*EPS is net of dividend on preference share capital
# EPS not annualised due to seasonality of business
Source: Capitaline Database |
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