Fineotex Chemicals

Fineotex Chemical has entered the capital market on 23^rd February 2011 with a public issue of 42.11 lakh equity shares of Rs.10 each, in the price band of Rs. 60 to Rs. 72 per share, aiming to raise Rs. 25-30 crore. The issue, comprising of 37.50% of the company's post issue paid-up capital, closes on 25^th February 2011.

The company is a tiny specialty chemicals and enzymes manufacturer with a single plant located at Mahape, Navi Mumbai with installed capacity of 5,000 MTPA, supply products to textile, leather, water treatment, construction, paper, paint, adhesives and agrochemical industries. For FY10, it reported sales of Rs. 21 crore and earned net profit of Rs. 3.6 crore. In H1FY11, sales and net profit stood at Rs. 13 crore and Rs. 2.1 crore respectively. On equity of Rs. 7 crore, this results in half yearly EPS of Rs. 3.06. Networth of the company, as of 30-09-10, stood at Rs. 17.2 crore. Thankfully, the company is debt-free.

The company proposes to set up a new specialty chemicals manufacturing facility, of 13,125 MTPA, at Khopoli, Maharashtra for Rs. 7.5 crore. However, this does not appear too exciting, since present capacity of 5,000 MTPA itself is under-utilised. For F10 capacity utilization was only 77%, moderately higher than FY09's 68.5%, indicating that, capacity, even once created, will lead to only a gradual ramp-up. Also, company is yet to acquire the 3 acres of land worth Rs. 96 lakh for the proposed expansion. The expansion project is most likely to get delayed beyond estimated completion schedule of early-2012, as order for entire machinery worth Rs. 3.4 crore is yet to be placed with the vendors.

Other objects of the issue include establishing a sales office in Mumbai with investment of Rs. 1.8 crore and working capital requirement of Rs. 8 crore, to support the increased capacity.

The issue appears weak mainly due to the following points:

•         Very small size of company with annual turnover of barely Rs. 25 crore

•         Highly competitive industry due to large presence of unorganised players

•         Company's increasing dependence on key customers - Contribution of top 5 customers rose from 31.38% of sales in FY08 to 56.42% in FY10, leading to very concentrated customer profile

•         Heavy equity dilution via IPO - Post-issue promoter holding to decline to 62.50% from present 100%

On the pricing front, at the upper end of the price band of Rs. 72, share is being issued at a PE multiple of 11.8 times, which is ridiculously expensive for a small speciality chemicals player.  The company is seeking a market cap of close to Rs. 81 crore (at upper band), having a sales run-rate of Rs. 26 crore, indicating price to sales multiple of 3x. This is unheard of in the chemicals industry.

Leading MNC player like BASF India, with expected FY11 sales of over Rs. 2,500 crore and net profit of about Rs. 185 crore, is ruling at a market cap of Rs. 1,950 crore, resulting in price to sales multiple of 0.78x and PE multiple of 10.5x. Taking this as a benchmark, Fineotex does not deserve a PE multiple even half of BASF, which is an MNC market leader, been in existence for many years.

Also, fate of recent listing in the same space, Omkar Speciality, is well-known. Share is currently quoting at 37, almost one-third its IPO price of Rs. 98, in barely 10 trading days from listing.

Thus, due to weak fundamentals and steep valuations, issue is a clear avoid.