Neogen Chemicals IPO – Consistent Performance – Should you Invest?
Neogen Chemicals IPO would open for subscription on 24th April, 2019. Neogen Chemicals are one of India’s leading manufacturers of bromine-based, and lithium-based, specialty chemicals in India. Its revenues grew at 20% CAGR in the last 5 years. Its margins are improving year on year. What are the various positive factors an investor should consider before investing in Neogen Chemicals IPO? Does this IPO give listing gains? Should you invest in the Neogen Chemicals IPO or avoid?
About Neogen Chemicals Limited
The company is one of Indias leading manufacturers of bromine-based, and lithium-based, specialty chemicals. Specialty chemicals are those chemicals that impart different properties to a variety of products and have a high degree of value addition. Specialty chemicals are, also generally, in the Indian context, manufactured in smaller volumes when compared to non-specialty chemicals. Specialty chemicals, including bromine and lithium-based compounds, comprise pharmaceutical intermediates, agrochemical intermediates, engineering, fluids, electronic chemicals, polymer additives, water treatment chemicals, construction chemicals and flavitss and fragrances.
Neogen Chemicals IPO Issue details
What are the Objects of the Neogen Chemicals IPO?
The Offer comprises of the Fresh Issue and the Offer for Sale (OFS).
1) Offer for Sale (OFS):
Each of the Selling Shareholders will be entitled to the respective proportion of the proceeds of the Offer for Sale net of their proportion of Offer related expenses. The company shall not receive any proceeds from the Offer for Sale.
2) Fresh Issue
The Net Proceeds from the Fresh Issue are proposed to be utilised towards the following objects:
a) Prepayment or repayment of all or a portion of certain borrowings availed by Company;
b) Early redemption of 9.8% FRCPS;
c) Long term working capital and
d) General corporate purposes
Who are the Company Promoters?
The Promoters of the company are Haridas Thakarshi Kanani and Harin Haridas Kanani.
How company is doing in terms of Financial Performance (Reinstated-Standalone)?
1) Company’s revenue increased from Rs 80.3 Crores for the year ended Mar-14 to Rs 164.8 Crores for the year ended Mar-18. Its revenues for 9 months ended Dec-2018 are Rs 159.8.
2) The company profits increased from Rs 3.6 Crores for the year ended Mar-14 to Rs 10.6 Crores for the year ended Mar-18. Its profits for 9 months ended Dec-18 are at Rs 12.2 Crores.
3) Its EPS for FY2018 is Rs 5.3 and 3 years average EPS is Rs 4.37. Its EPS for 9 months ended Dec-18 is at Rs 6.12.
What are the key strengths of Neogen Chemicals Limited?
Every investor should understand companies key strengths so that one can compare with its competitors to know how unique is such company. Investors investment decision would change based on these facts.
1) The company has experienced promoters with domain knowledge.
2) The company has large and diverse array of products.
3) It has diversified and stable customer base.
4) Company has management expertise.
5) This organization has specialised business model with high entry barriers.
6) It has established and stable relationship with suppliers.
What are the sarious strategies of Neogen Chemicals Ltd?
Company strategies would help investors to know what company is intending to do in the future and whether these strategies would help in revenue or margin growth. Such information would help for investors to decide whether to invest for short term, medium term or for the long term. Here are the company strategies.
1) Expanding its production capacities can increase its revenue growth.
2) Increasing its contract manufacturing portfolio.
3) Augmenting growth in domestic and global markets can provide enormous opportunities for growth.
4) Improving financial performance through focus on operational efficiencies and functional excellence. This can improve margins.
5) Focus on advanced specialty intermediates which offer higher value addition.
Positive Factors to invest Neogen Chemicals Limited IPO
1) It shown strong revenue growth at 20% CAGR in the last 5 years.
2) It has shown good improvement in margins in the last 5 years. Its profits grown at 31% CAGR. Its profits are at Rs 6.4 for every Rs 100 of revenue.
3) Company is one of India’s leading manufacturers of bromine-based, and lithium-based, specialty chemicals in India.
Major risk Factors to consider before investing in this IPO
These risk factors can impact company revenue and margins which would have direct impact on its share price.
1) Neogen Corporation has filed a commercial, intellectual property suit against a company which, if determined against a company may have an adverse effect on this Offer, its business and results of operations.
2) There are proceedings pending against the company and its Directors, which, if determined against the company or these directors, may have an adverse effect on its business and results of operations.
3) The company is heavily reliant on the demand from application industries such as pharmaceuticals, Agrochemicals, refrigeration and construction chemicals. Any downturn in the application industries could have an adverse impact on the company’s business and results of operations.
4) The company does not have long-term agreements with suppliers for its raw materials and an increase in the cost of, or a shortfall in the availability or quality of such raw materials could have an adverse effect on its business and results of operations.
5) Unsecured inter corporate deposits taken by the company can be recalled by the lenders at any time.
6) They had negative net cash flows from investing activities in the past and may continue to have negative net cash flows in the future.
7) Its manufacturing process involves the use of hazardous and flammable industrial chemicals which entails significant risks and could also result in enhanced compliance obligations.
8) Failure to meet quality standards required by its customers for its products and processes may lead to cancellation of existing and future orders and expose them to warranty claims.
9) They are subject to strict customer specifications in terms of its customer contracts for custom synthesizing and contract manufacturing. Failure to adhere to the specifications may lead to cancellation of existing and future orders or expose us to warranty claims.
10) They operate in a highly competitive industry. Any inability to compete effectively may lead to a lower market share or reduced operating margins.
11) They have a high working capital requirement and if they are unable to raise sufficient working capital its operations will be adversely affected.
12) For complete internal and external risk factors, you can refer the RHP of the company.
Neogen Chemicals IPO Schedule
Offer Opens – 24-Apr-2019
Offer Closes – 26-Apr-2019
Finalization of Basis of Allotment – 3-May-2019
Unblocking of ABSA and Initiation of Refunds – 6-May-2019
Credit of shares to Demat Accounts – 7-May-2019
IPO Shares Listing Date – 8-May-2019
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Neogen Chemicals IPO – Consistent Performance – Should you Invest?
If we consider its standalone last year EPS of Rs 5.3 to the highest price band of Rs 215, the P/E works out to be 41x. If we annualize standalone EPS of Rs 6.12 for 9 months ended Dec-18 and a higher price band of Rs 215, the P/E works out to 25x. Similarly, if we take consolidated EPS of 3 years average of Rs 6.12, P/E works out to be 49x.
Means company is asking highest price band of Rs 215 in the P/E of 25x to 49x. Its competitors like Navin Fluorine International is trading at P/E of 19.5x (Lowest) and Vinati Organics at P/E of 58x (Highest) and the industry average P/E is at 37.6x, hence the IPO Price band of Rs 215 per share is fully priced.
The company has grown at 20% CAGR in revenue and 30% CAGR in terms of profits in the last 5 years. However, it earns thin margins (6.5% only). Its IPO price is also fully priced. High risk investors who are willing to invest for medium to long term of 3-5 years can invest in this IPO. Recently listed Polycab IPO has provided listing gains. Investors may expect some listing gains in this IPO too owing to this trend.
Disclaimer: The information in this article is for information only. This is not a recommendation to invest in this IPO. Please consult your investment advisor before you invest in such high risk IPOs.
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Neogen Chemicals IPO – Consistent Performance – Should you Invest