IPO Size: Rs. 126 cr (75% reserved for institutions)

• 90% is fresh issue for capex (Rs. 26 cr) and incremental working capital (Rs. 54 cr)
• 10% is offer for sale (OFS) by promoter, trimming 95% stake to 74%

Price band: Rs. 262-274 per share

Mcap: Rs. 503 cr, implying 25% dilution

IPO Date: Wed 15^th Dec to Fri 17^th Dec 2021, Listing Mon 27^th Dec 2021

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

Strengths:

1. Revenue grew at 17% CAGR between FY19-21: Adhesives and sealants manufacturing company, with adhesives accounting for 75% of FY21 revenue of Rs. 118 cr. West India accounts for half the revenues, with products marketed via 50,000 dealers under brands Strong Weld, HP, Strong Seal, Strong Fix.
2. New products silicon sealants, PVA adhesives and synthetic rubber adhesives, launched in 2019 and 2018 respectively, accounted for 16% of Rs. 70 cr revenue in H1FY22.
3. Planned capacity increase: Unlike most IPOs these days which are offer for sale, fresh issue is the main component in this IPO, wherein, company plans to more than triple sealant and adhesive capacity, over the next 3 years, to 11,900 MTPA, from present 3,275 MTPA.

Concerns:

1. Inconsistent and Low Margins: Rising raw material prices exerted pressure on EBITDA margins, which slipped from 15% in FY21 to 10% in H1FY22. Company’s historical EBITDA margin has been in 7-10% range, lower than peer Pidilite’s 21-24%. Due to input price inflation, H1FY22 PAT margin halved to 4.4% from FY21’s 8.5%, vis-à-vis Pidilite’s 13% for H1FY21.
2. Company’s small size of operations make it a micro cap stock, highlighting risk of poor credit rating of BBB-, 90%+ attrition rate at plant and 25% at depots/sales, factory land taken on lease from promoters.
3. Unjustified Pricing: On FY21 EPS of Rs. 7.7, IPO is priced at a PE multiple of 35x. Even if FY23E earnings are factored in, PE multiple works out to 30x, which is aggressive for company’s revenue size and margins, both of which are nowhere close to giant Pidilite’s Rs. 7,500 cr revenue and much superior and consistent margins. Pidilite’s industry-leading multiples are justified by its debt-free balance sheet, near-monopoly status in the market, better working capital management (double of HP Adhesives’ inventory and debtor turnover) - hence it is valued like a FMCG and not a chemical stock.