IPO Size: Rs. 501 cr 

• Fresh Issue of Rs. 302 cr for working cap (Rs. 185 cr), capex (Rs. 28 cr) and loan repayment (Rs. 23 cr)
• Offer for sale (OFS) Rs. 199 cr: 60% by the promoters (87.5% to drop to 64.6%), 40% by 3 investors completely exiting their 6% aggregate holding.

Price band: Rs. 160-169 per share  

M cap: Rs. 1,654 cr, implying 30% dilution

IPO Date: Wed 22^nd Nov to Fri 24^th Nov 2023, Listing Tue 5^th Dec 2023

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

Specialty Oils Manufacturer

Gandhar Oil is India’s largest white oil manufacturer, with 25% market share, used in personal care industry. Company’s business is split in 4 divisions:

1. Personal care, Healthcare and Performance Oils (PHPO) accounted for 51% of Rs. 4,100 cr revenue in FY23
2. Lubricants – comprises 23% of revenue
3. Process and Insulating Oils such as transformer oil and rubber processing oil – accounting for 9% of revenue
4. Channel Partners, accounting for 10% of revenue, comprises sales of products to end-users.

Marketed under brands Divyol and Texol, Gandhar’s products are used to make end products for consumer, healthcare, automotive, industrial, power, tyre and rubber sectors. 40% revenue is earned through exports.

Capacity Increase over 2 years

Current production capacity of 5.2 lakh KL is being increased by 22-23% to about 6.4 lakh KL, in phases, till March 2026, for which, capex is underway, a part or Rs. 59 cr to be funded via fresh issue proceeds and Rs. 23 cr term loan taken for capex also being repaid from issue proceeds.

Profit De-growth in Q1FY24

Q1FY24 EBITDA dropped 12% YoY to Rs. 85 cr, from Rs. 97 cr in Q1FY23, despite 21% YoY jump in topline (which was entirely volume led) to Rs. 1,070 cr, as it was not able to pass on rising input cost. PAT for owners slipped 23% YoY to Rs. 45 cr in Q1FY24, leading to an EPS of Rs. 5.6, against Rs. 7.3 in Q1FY23. FY23 EPS stood at Rs. 23.8, on an annual net profit of Rs. 190 cr (which is wrongly mentioned as 1,190 cr on page 88 of RHP).  

Lacklustre Margins

Gandhar operates on 12-13% gross margin, with just 8% EBITDA. This leads to mid-single digit net profit margin - In FY23, net margin stood at 5.2% and at 5.1% in Q1FY24. Since 15% is share of minority in the profits, effective PAT margin for owners of the company is barely at 4.5%, which highlights lack of any ‘specialty’ nature of company’s products.

Thus, while capex ensure topline growth visibility, single digit margins call for low valuation multiples.  

Valuation Saves the Day

On FY23 EPS of Rs. 23.8, shares are being offered at historic PE multiple of only 7x, which is low for Rs. 4,000+ cr topline and 28% RoE. Even factoring in decline in PAT, FY24E PE multiple stands at below 8x, which is undemanding even for the low margin business.

Gandhar can be compared to companies supplying to FMCG players, such as:

• S H Kelkar, supplying flavors and fragrances to food and personal care industry, has a topline of Rs. 1,750 cr and net margin about 4%, is ruling at 29x PE multiple.
• Galaxy Surfactants, supplying raw material to detergent markers, has Rs. 4,500 cr topline and 8.5-9% net margin, is trading at a PE multiple of 28x.

Thus, Gandhar’s pricing is very attractive and has left enough money on the table for prospective investors. The ongoing ‘flood of IPOs’ may have probably prompted the company and its bankers to adopt a ‘generous’ approach while pricing the IPO.