Chemcon Speciality Chemicals is a manufacturer of specialised chemicals, such as HMDS (hexamethyldisilazane) and CMIC (chloromethyl isopropyl carbonate), which are predominantly used in the pharmaceuticals industry. Further the company also manufacturers inorganic bromides namely Calcium Bromide, Zinc Bromide and Sodium Bromide, which are predominantly used as completion fluids in the oilfields industry. It is the only manufacturer of HMDS in India and were the third largest manufacturer of HMDS worldwide in terms of production.
Upcoming Capex likely to boost pharma chemical revenue & OPM
The company has recently increased its capacity for HMDS from 1800 MT to 4800 MT (~600 MT high purity HMDS and rest normal HMDS). Further, the company also plans to utilise around Rs. 41 crore from the IPO proceeds for the expansion of CMIC, which should likely to expand company's processing capacity by ~60%. We believe the company enjoys higher realisations in its pharma chemical business as compared to oil field chemicals and thus, it is evident that these two business verticals will likely to grow at decent pace in the coming few years on the back of import substitution. This should provide better OPM visibility for medium term.
Key risk & concerns
- Pricing pressure from China to impact performance ahead
- High working capital remains a key risk for balance sheet
- Priced at P/E of 25.5x (post issue) FY20 on upper band
Since CMIS goes into Tenofovir and with expectations of better growth outlook from the aforementioned drug over the period, one can expect better growth outlook for the company. Further, increase in the capacity for both HMDS and CMIS by Chemcon, one should expect pharma chemical business revenue to be more tilted to the group revenue ahead and thereby the operational performance. At the higher end of the price band of Rs. 340, the stock is available at a P/E of ~25.5x (on post issue basis) and EV/EBITDA of ~15.8x (post issue). We have a SUBSCRIBE rating on the issue.
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