Neogen Chemicals IPO Review – 10 Things you need to know!

About the Company – Neogen chemicals limited is a Thane, Mumbai based company involved in manufacturing specialty chemicals. The company was incorporated as “Neogen Chemicals Private Limited” on 7th March 1989 as a private entity. Later, on 2nd July 1998, it was transformed into a public limited company. It offers a wide range of specialty chemicals ranging from organic to inorganic chemicals. This includes bromide based chemicals and lithium-based chemicals. Also Grignard based reagents. 

Issue Details – 

Dates- 24 to 26 April 2019

Price – Rs 212- 215

Minimum Lot – 65 Shares

Minimum Application Amount – Rs 13975

Total Issue Size 132.35 Cr (Fresh Issue of Rs 70 Cr and Offer for sale of Rs 62.35 Cr)

Promoters of the Company – 

Haridas Thakarshi Kanani & Harin Haridas Kanani are the promoters of Neogen Chemicals Limited.

Customer Segments – 

The major clientele of the Neogen chemical limited includes clients from industries like agrochemical, Pharma, electronic chemical, fragrance, and flavors.

Objects of Offer-

  • Repayment of all or a portion of loans availed by the company 
  • Redemption of 9.8% FRCFS
  • Long term working capital
  • General corporate purposes

Risks – 

  • During the 9 month period ended December 31, 2018, Fiscal 2018, Fiscal 2017 and Fiscal 2016, the revenue from sale of organic and inorganic chemicals to pharmaceutical industry was Rs 1,314.67 million, Rs 1,061.95 million, Rs 580.71 million and Rs 528.64 million, constituting 82.56 %, 65.17%, 52.47% and 52.43% of the revenue from Operations on a consolidated basis, respectively.
  • The company usually does not enter into long-term supply contracts i.e. for a period of more than one year with any of their raw material suppliers.
  • During the 9 month period ended December 31, 2018, Fiscal 2018, Fiscal 2017 and Fiscal 2016, the revenue from organic chemicals was Rs 1,259.35 million, Rs 1,056.23 million, Rs 634.20 million and Rs 732.18 million, constituting 78.65%, 64.82%, 57.30% and 72.62% of their total revenue from Operations on a consolidated basis, respectively. 
  • Moreover, during the 9 month period ended December 31, 2018, Fiscal 2018, Fiscal 2017 and Fiscal 2016, the revenue from inorganic chemicals was Rs 341.86 million, Rs 573.18 million, Rs 472.57 million and Rs 276.07 million, constituting 21.35 %, 35.18%, 42.70% and 27.38% of Revenue from Operations on a consolidated basis, respectively.
  • Contingent liability of Rs 6 Cr as at Dec 31, 2018.

Key Growth Drivers – 

  • Increased intensity of consumption.
  • End-use demand.
  • Improved consumption standards.
  • Government initiatives.
  • Favorable global factors.

Valuations & Peer Comparison – 

After annualizing the 9-month EPS of Rs 6 to Rs 8, the issue is priced at 26.9 times price to earnings and 10.8 times price to book value. Given its return ratios are lower than the industry or at par, the issue is fully priced and only a few percentage points of returns are left on the table for investors. At the same time, its high raw material costs and debt to equity ratio are towards the higher side, affecting the company’s operational efficiencies. 

Industry –

Within global chemicals, specialty chemical is a key segment, valued at $743.80 billion in 2017. Specialty chemicals are widely used for specialized applications, especially to meet the industry-specific requirement. These chemicals impart a variety of properties to products, have a high degree of value addition, and are produced in a small volume.

By 2022, the global specialty chemicals market is expected to grow at 5.47% CAGR to $970.55 billion. The steady growth is because of sustained demand in end-user industries. Rapid industrialization in China and India is also driving demand for specialty chemicals.

Here’s an overview of the Chemicals Industry –

Conclusion – 

There is not much upside left in this issue given that it is fully priced but at the same time being a small issue size and the recent IPO performances, investors will flock to subscribe to this issue and hence Investors should “Subscribe with caution” to this IPO issue for some listing gains.

Source – Draft prospectus of Neogen filed with SEBI and exchanges

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