IPO Size: Rs. 152 cr, Entirely Fresh Issue

• Greenfield Capex - Rs. 80 cr
• Working Capital - Rs. 45 cr

Price band: Rs. 133-140 per share

M cap: Rs. 608 cr, implying 25% dilution

IPO Date: Wed 27^th Sep to Tue 3^rd Oct 2023, Listing Mon 9^th Oct 2023

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

Paracetamol API maker

Valiant Laboratories, wholly promoter-owned, of which, effectively 46% held by listed Valiant Organics Limited (Aarti Industries and Aarti Pharmalabs are other group companies), manufactures paracetamol API at its sole manufacturing unit, of 9,000 MTPA capacity in Maharashtra. Company is undertaking a massive capex of Rs. 266 cr for backward integration and product diversification.

Sizeable Capex Underway

Company is setting up a 5,224 MT per month or 62,688 MTPA capacity specialty chemicals plant for ketene derivatives (including acetic anhydride, a key raw material) and diketene derivative products, in Bharuch, Gujarat, to be operational by Q4FY24. This may get delayed by a few months as equipment procurement was to be completed by Oct 2023, but orders have not yet been placed, as of 18^th Sep 2023.

Company’s planned capex is sizeable, as current fixed assets is just at Rs. 29 cr. Rs. 45 cr capex has already been incurred, Rs. 80 cr IPO proceeds will part fund, debt Rs. 100 cr and Rs. 40 cr from internal accruals. Factoring in incremental debt towards capex and working capital, current gross debt of Rs. 60 cr will swell to Rs. 230 cr, in the next 18 months. Company is rated A-/Stable by Crisil.

Dealings with Group Company Valiant Organics

Para amino phenol, another key raw material, hitherto imported, is now sourced from the ultimate holding company Valiant Organics. Purchases from Valiant Organics accounted for 82% of Valiant Laboratories’ FY23 raw material consumption and for Valiant Organics too, this relationship is significant, constituting 1/4^th of FY23 revenue.   

High Single Digit Margin

Between FY21-23, volumes grew at 18% CAGR and revenue at 35% CAGR from Rs. 182 cr to Rs. 334 cr. But PAT remained flat at Rs. 29 cr, due to abnormal profits in FY21. With a single digit market share, company is a price taker in the Rs. 3,900 cr domestic paracetamol API industry. Material cost comprise 83% of topline, leading to 17% gross margin, 12% EBITDA and 8.7% net margin. FY23 EPS stood at Rs. 8.9.

Attractive Valuation

Peer Granules India, which derives ~40% of its Rs. 4,500 cr revenue from paracetamol, clocks 50% gross margin and 11.5% net margin, is trading at a PE multiple of 19x. Valiant Laboratories, with 1/12^th topline of Granules and lower net margin, is being offered at a PE multiple of 16x, which is seen attractive for 29% RoE and a healthy growth visibility. FY25E onwards, once the new facility gets commissioned, company revenue and profit will increase substantially, but exact quantum is difficult to judge now, as end-product prices have been fluctuating sharply of late.

Increasing leverage (net debt to equity ratio to rise to 0.8:1) and status of a micro-cap stock (and possibly subject to ASM) post listing are the only two limitations.