IPO Size: Rs. 1,462 cr

• Rs. 805 cr is fresh issue to repay Rs. 644 cr high-cost debt (net debt equity ratio to decline from 2.1 to 0.1 post IPO)  
• Rs. 657 cr is offer for sale (OFS), mainly by India Resurgence Fund and Piramal Natural Resources, trimming 32% combined holding to 15%.

Price band: Rs. 386-407 per share

• Retail only 10% as net loss in FY20

M cap: Rs. 5,008 cr, implying 29% dilution

IPO Date: Wed 9^th Nov to Fri 11^th Nov 2022, Listing Mon 21^st Nov 2022

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Specialty Chemicals Maker

10 year old company produces bromine and industrial salt from brine reserves in Rann of Kutch, Gujarat. Archean is among world’s lowest cost producer and India’s largest exporter for both these specialty chemicals. It is both a volume-cum-cost leader. FY22 revenue was Rs. 1,130 cr, split almost equally between bromine and industrial salt, with exports at 70% of revenue, mainly to Asian countries.

Massive Expansion Underway – Tripling Bromine Capacity

Company has incurred Rs. 330 cr capex between FY20 to Q1FY23 to (i) double bromine capacity from 28,500 MTPA (as of 30.6.22), to 59,000 MTPA (ii) expand industrial salts washery capacity by 30% from 600 tons/hour to 850 tons/hour, both by FY23-end. In addition, it is also undertaking Rs. 250 cr capex for additional 28,000 MTPA greenfield capacity of bromine performance derivative products, including flame retardants in technological partnership with a Chinese buyer, committing to purchase 90% production. This additional capacity is likely to commence production by Q2FY24.

Strengthening Financials

FY22 revenue of Rs.1,130 cr rose to Rs. 400 cr in Q1FY23, as volumes rose ~30%, leading to Rs. 170 cr EBITDA, up from RsFY22’s Rs. 480 cr. Raw material cost is < 5% of revenue, although freight and handling cost are nearly 40%, leading to 42% EBITDA margin.

Since Rs. 644 cr debt of total Rs. 910 cr, bearing 17% interest pa, will be repaid from IPO proceeds, Rs. 110 cr annual interest savings will augment bottomline, which stood at Rs. 84 cr in Q1FY23 and Rs. 190 cr in FY22. EPS for Q1FY23 and FY22 were Rs. 8 and Rs. 18 respectively.

Valued as a Mining Company

Factoring in the incremental capacity, FY23E EPS stands close to Rs. 35, whereas FY24E growth is higher, with an estimated EPS of Rs.55, leading to current year and one year forward PE multiples of 12x and 7x respectively, which are seen very attractive.

Company’s business model is more like that of a mining company, with end-product being specialty chemicals. Since bromine realisation is about Rs. 300/kg and its share in company’s revenue mix will rise, these valuation multiples have room to expand, despite industrial salt realization being only Rs. 1.4/kg.  

The industry has high entry-barriers due to access to reserves (only Dead Sea in Israel/Jordan and Underground wells in US have higher bromine-reserves than Rann of Kutch), product quality, material handling skills among others. But company enjoys high revenue visibility due to fixed sales contracts, with agreed pricing and volumes 12 months in advance for bromine and 24 months for industrial salts.