By Geetanjali Kedia

Shree Pushkar Chemicals and Fertilizers is entering the primary market on Tuesday 25^th August 2015, to raise Rs. 70 crore, in the price band of Rs. 61 to Rs. 65 per share. The issue comprises a fresh issue of Rs. 57-58 crore for 94 lakh to 87 lakh equity shares of Rs. 10 each, at the lower and upper end of the price band respectively, coupled with an offer for sale of 20 lakh shares worth Rs. 12-13 crore by IFCI Venture. The issue, representing 36.6%-38.1% of the post-issue paid up share capital respectively, closes on Thursday 27^th August.

Moreover, Keynote is the BRLM to the issue. Past issues managed by this merchant banker on the main exchange (excluding SME platform) post a very scary picture. Both Servalakshmi Paper and Bedmutha Industries are quoting down 88% from their respective issue prices while Prakash Steelage is ruling flat at issue price i.e. nil return in past 4 years (source: https://www.sptulsian.com/databank/ipo_statistics). History clearly paints a very cautious picture, as far as this merchant banker is concerned!

Shree Pushkar Chemicals is a manufacturer of dye intermediates, which accounts for ~80% of revenues, besides other products such as acid complex (sulphuric acid and derivatives), cattle feed supplement and fertilizers (single super phosphate and soil conditioner). Company’s manufacturing facility in Ratnagiri, Maharashtra has an installed capacity to manufacture 960 MTPA of K-acid, a dye intermediate. It is acquiring an existing unit in Maharashtra to set-up facility for 3,000 TPA reactive dyes, 750 TPA H-acid and 1,000 TPA vinyl sulphone ester facility, with capex of Rs. 44 crore. Another Rs. 7 crore from IPO proceeds is proposed to be utilized for effluent treatment plant and additional godowns at existing plant. In the past, as company has witnessed delay of anywhere between 3 to 12 months in execution of 4 of its projects, for acid complex and fertilizer, for several reasons. Thus, delay in executing the current expansion project is also not ruled out, which may lead to sharp time and cost over-runs.

For FY15, company revenues grew 27% YoY to Rs.267 crore, but EBITDA growth was lower at just 8% YoY to Rs. 32 crore, contracting EBITDA margins from 14.0% in FY14 to 11.9% in FY15. Thanks to interest cost reducing by nearly half to Rs. 5.4 crore in FY15 from Rs. 10.6 crore in FY14, net profit surged 79% YoY to Rs. 18.7 crore in FY15, leading to an EPS of Rs. 9, on equity of Rs. 20.71 crores, as of 31-3-15. However, given the competitive and cyclical nature of business, net margins in the business are very thin at 7% for FY15 and 5% for FY14. Moreover, company is dependent on few clients for business – for FY15 top five customers accounted for 45% of revenue, which was over 50% in FY14. Thus, there is continuous risk on margins.

Pages 35, 104 and 173 of the RHP state ‘As on the date of this RHP, our Promoter and Promoter Group hold 87.96% while the balance 11.72% is held by IFCI Venture Capital Fund.’ However, this statement is contradictory with pages 58 and 63, which state shareholding pattern and top 10 shareholders as on date of RHP mentioning IFCI Fund’s stake at 11.30%. Gross lax on the part of company and BRLM!  IFCI’s 11.72% holding was 10 days prior to filing the RHP. Since company has raised Rs. 5 crore in a pre-IPO placement from a bunch of private corporates and individuals at Rs 65 each, for 7.69 lakh equity shares, on 10 Aug 2015, its equity has risen to 21.48 crore now. 

As of 31-3-15, company’s net worth stood at Rs. 88 crore, while total debt was Rs. 25 crore. Currently, promoters hold 84.81% stake, of which, 20% is encumbered. Post-IPO promoter holding will decline to 61.85%, while that of IFCI will shrink to barely 1.36% from 11.30% currently.  

At the lower and upper end of the price band, shares are being offered at PE multiples of 6.8x and 7.2x respectively, which is extremely expensive. Peers such as Bodal Chemicals, Shree Hari Chemicals and Bhageria Dye Chem, all have stronger net margins in the range of 8-11% are currently ruling between PE multiples of 2 and 4 times, on the secondary market. Hence, there is no justification for Shree Pushkar to command double the valuation of peers, that too in primary market. Also, company can not be compared to specialty chemical majors, as product profile and margin picture varies significantly.  

Given the bankers track record coupled with exorbitant valuations, the issue is a simple avoid.

Also, current secondary market conditions make it imprudent to park money in small caps for the moment

Disclosure: Not applying in the IPO.