Verdict: Good for Long Term

Rs. 600 cr IPO comprising:

• 50% fresh issue to fund capex (Rs. 150 cr), debt repayment (Rs. 180 cr), working cap (Rs. 73 cr)
• 50% OFS by promoter

Price Band: Rs. 129-130 per share

Dilution: Total Issue size is 17.5% of post-issue capital

IPO dates: Mon 15^th to Wed 17^th Mar 2021

Listing: 25^th Mar 2021

Pre-IPO placement worth Rs. 200 cr to 5 funds at Rs. 129 per share, in early March.

Specialty Chemicals Company undertaking Rs. 380 cr Capex

Caters to pharma, agro chem, packaging, pigments sector. Looking to expand capacity in its 3 products segments:

1. Acetyl Intermediates (AI): 50% revenue mix with high single digit EBITDA margin. 30% market share in domestic ethyl acetate, 1.6 lakh MT capacity to increase by 25% to 2 lakh MT by FY22-end. Ethyle acetate, a green solvent, is preferred over aromatic solvents for food packaging in EU. If such regulation implemented in India, company would be huge beneficiary.
2. Specialty Intermediates (SI): 28% revenue mix with 20%+ EBITDA margin, due to import substitution and high product innovation. India’s sole diketene derivatives manufacturer with 55% market share (balance imports from Europe, China). Undertaking Rs. 137 cr capex to hike capacity by 6% by Nov 2021 to 82,525 MTPA.
3. Fluorospecialty (FS): no revenue yet, EBITDA margin to be higher than SI. Acquired niche organic fluorospecialties and electro-chemical fluorination business of Italy’s Miteni. Establishing 13,820 MT greenfield plant in Maharashtra, with Rs. 240 cr capex by Mar 2022. Positive outlook for fluorine, as 33% APIs, 50% agro chemicals and 20% pharma products likely to be fluorine based in future. 

Margins Low, to improve as Mix changes

FY20 revenue contracted 2% YoY to Rs. 1,534 cr, due to non-operation of main SI plant for a month on account of flood, leading to 3% YoY fall in PAT to Rs. 70 cr (4.6% net margin) and EPS of Rs. 2.9, on equity of Rs. 45 cr (FV  Rs. 2 each). Trading accounts for ~15% of company’s topline, leading to 11% EBITDA margin on an overall basis,over 25%+ for peers.

For H1FY21, revenue rose to Rs. 813 cr, PAT to Rs. 45 cr and higher net margin of 5.6% and EPS of Rs. 2. Laxmi has not disclosed Q3FY21 performance, but most specialty chemical players have exceeded Q2 earnings in Q3 and Laxmi may be no different going by improved capacity utilisation. As operating leverage kicks in, bottomline is likely to grow dis-proportionately. Over a longer term, as company moves up the value chain and FS starts contributing to revenues FY23 onwards, EBITDA margin should rise upwards of 15%. Balance sheet is sound, with Rs. 472 cr net worth (30.9.20), post Rs. 81 cr buy-back for IFC exit in Jan 2020.

Valuation:

At Rs. 130, company’s market cap will be Rs.3,430 cr leading to FY22E PE multiple of 23x, which is marginally lower than the peer range of 25-45x for the likes of Atul, SRF, Aarti Industries. While Laxmi’s EBITDA margins are lower, expected revenue growth, debt profile, return ratios are comparable or better than peers, making the current pricing appear undemanding. Margins catching up is a matter of time, as revenue mix of high margin products improves from current 28% to 50%. Laxmi also scores over Anupam Rasayan, the other specialty chemicals IPO that is open, on three counts (i) higher inventory turnover of 11x against Anupam’s 2x (ii) stronger RoE of 16% as against Anupam’s 10% (iii) lower PE multiple of 23x over 41x.

Conclusion:

Company’s fundamentals remain strong and it is on a steady growth path, thanks to rising capacity utilization and planned expansion. Financials are likely to show good growth from FY23E onwards, hence one can invest in the IPO with a long term view.

Grey Market Premium (GMP) of Laxmi Organic: Grey Market Premium of Laxmi Organic is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.

Disclosure: No Interest.