Verdict: Growth justifies aggressive pricing

IPO Snapshot:

Rossari Biotech is entering the primary market on Monday 13^th July 2020, to raise Rs. 496 crore via an IPO of equity shares of Rs. 2 each, comprising fresh issue of up to Rs. 50 crore and an offer for sale (OFS) of up to 1.05 crore by the promoters, in the price band of Rs. 423-425 per share. A pre-IPO placement worth Rs. 100 crore was undertaken on 27^th Feb 2020 at Rs. 425 per share to a clutch of domestic financial institutions. The net issue represents 22% of the post-issue share capital and will close on Wednesday 15^th July, with listing likely on 23^rd July.

Company Background:

Rossari Biotech is a specialty chemical maker having a plant at Silvassa, with an installed capacity of 1.2 lakh MTPA (fungible across products), operating at 82% utilisation in FY20. In July 2020, company has commissioned a greenfield facility at Dahej, being established with total investment of Rs. 90 crore (Rs. 75 crore spend), to be fully operational by March 2021, with an installed capacity of 1.32 lakh MTPA. Company manufactures over 2,000 products under 3 business segments:

1. Home, personal care and performance products (47% of FY20 revenue of Rs. 600 crore): chemicals for detergents, surface cleaners, water treatment, paints, coatings, ceramics.
2. Textile specialty chemicals (44% of revenue): One of country’s largest textile specialty chemicals manufacturer catering to entire value chain, including pre-treatment, processing, dyeing, finishing. However, segment revenue contracted 2% YoY in FY20 and demand environment remains challenging in the covid environment.  
3. Animal health and nutrition (10% of revenue): Poultry feed supplements, pet grooming and pet treats.   

During covid-lockdown, the Silvassa plant was manufacturing disinfectants and sanitisers and was operational, although initial constraints of material supplies and labour were faced. 

Objects of Issue and Shareholding:

Fresh issue (Rs. 50 crore) and pre-IPO placement (Rs. 100 crore) issue proceeds will be used towards:

1. Debt repayment of Rs. 65 crore of current total debt of Rs. 67 crore. Thus, company will become debt-free post IPO.
2. Working capital funding of Rs. 50 crore to fund Dahej production
3. Balance for general corporate purposes.

Promoters own 95% stake in the company, which will shrink to ~73% post OFS.

Financials:

Since FY17, revenue and EBITDA grew at a CAGR of 32% and 63% respectively, mainly due to doubling of installed capacity to 1.2 lakh MTPA during this period and subsequent production ramp-up, especially in the fiscal FY19. FY20 revenue rose 16% YoY to Rs. 600 crore, with EBITDA rising 38% YoY to Rs. 108 crore, leading to EBITDA margin of 18%. On PAT of Rs. 65 crore, net margin and EPS stood at 11% and Rs. 13 respectively for FY20, on equity of Rs.10.15 crore (expanded by Rs. 5.28 crore pursuant to 6:5 bonus issue in Dec 2019 and by Rs. 0.47 crore due to pre-IPO placement in Feb 2020).  

Net worth (31-3-20) stood at Rs. 287 crore, translating into BVPS of Rs. 56. While gross debt stands at Rs. 67 crore, cash and equivalents are Rs. 141 crore, including Rs. 100 crore from pre-IPO placement. Company’s working capital management has also shown improvement, with outstanding debtor days reducing to 57 days (FY20) from 74 days (FY18) and inventory turnover also shrinking to 35 days, from 42 days respectively. In FY20, fixed assets, capital work-in-progress and capital advances have also increased by about Rs. 53 crore, indicating investment in capacity augmentation at Dahej.

Besides improving margins, return ratios are also healthy, with RoCE and RoE of 25% and 32% respectively for FY20. These are likely to be maintained, given 2 financial tailwinds:

1. More than doubling of capacity in FY21 will lead to high topline growth, especially in the home, personal care and performance chemical segment. 
2. Raw material prices on a downtrend to continue margin expansion: company’s biggest raw material is acrylic acid, prices of which are crude-linked and averaged USD 1,653 per MT in FY19, USD 1,725 per MT in FY18 and USD 1,878 per MT in FY17. Thus, material cost reduced by 380 bps in FY20, leading to substantial margin expansion, a trend which may continue into the ongoing fiscal.

Valuation:

At Rs. 425 per share, company’s market cap will be Rs. 2,207 crore, leading to a PE multiple of 32x on historic basis and 24x on current year estimates. Following is a peer comparison of listed specialty chemical companies:  

From the above table, Rossari is the only company to have posted meaningful topline growth in FY20, along with healthy margin profile. This growth trend is likely to continue into FY21 and FY22 justifying the high PE multiple, despite smaller scale.

While SRF, Atul and Aarti have much larger toplines, they have a diversified product portfolio with superior margin profile. Vinati Organics and Fine Organics clock one of the highest margins in the industry, supporting their high PE multiple. Galaxy Surfactants, also catering to FMCG industry, is a good peer, with installed capacity of 4.4 lakh MTPA. While its topline is 4x of Rossari, it de-grew in FY20 due to slowdown in India and America, despite Egypt clocking double digit growth. At 14% EBITDA margin, Galaxy’s PE multiple is only at a slight discount to Rossary. SH Kelkar, supplying fragrance to personal care industry, was the only one to record mid-single digit revenue growth in FY20 among the listed peers, although its margins contracted sharply. Hence, it is also ruling a much lower PE multiples. Thus, although PE multiple of 24x looks aggressive for its smaller scale, peer comparison and expected financial growth over FY21 and FY22 partly justify it. Although we do believe that company could have left about 10% on the table, since share prices of peers are still down anywhere between 5-15% from their pre-covid levels, whereas IPO is being undertaken at the same price i.e. pre-IPO placement price of Rs. 425.

Conclusion:

Healthy growth visibility, expanding margins, debt free balance sheet (post IPO) and tailwinds in the home and personal care industry make up for the aggressive issue pricing. Hence, one can consider the IPO with a medium term outlook.

Grey Market Premium (GMP) of Rossari Biotech: Grey Market Premium of Rossari Biotech is an unofficial figure, against guidelines of SEBI. We strongly recommend investors against following the grey market premium. To know more about grey market premium and how it operates, read our article on ‘grey market premium’ in Pathshala column.

Disclosure: No Interest.