Mr. Keshav Lahoti, Associate Equity Analyst, Angel Broking Ltd
Rossari Biotech is one of the leading specialty chemicals manufacturing companies in India providing customized solutions to specific industrial and production requirements of the customers. It caters to the FMCG, apparel, and poultry & animal feed industries which contributed 46.8%, 43.7% and 9.5% respectively to F.Y.20 revenue.
Positives: (1) It is the largest textile specialty chemical manufacturer in India. (2) It has experienced promoters along with strong management team. (3) Company also has proven track record of robust financial performance. (4) Surge in home, personal care and performance chemicals (sanitizers, cleaning products) demand due to covid-19. (5) Doubling of capacity to 252,500 MTPA by F.Y.21 end from 120,000 MTPA as on F.Y.20 end. Post the increase in capacity, Company will have to incur just maintenance capital expenditure for the next 3-4 years. (6) Only 10% of sales are dependent on imported raw material, of which less than 5% comes from China.
Investment concerns: (1) Slowdown in demand especially from textile industry. (2) Revenue is dependent on top 5 customers which contributed 43.9% of revenue for F.Y.19-20. (3) Delay in addition of new capacity or lower utilization ratio of new capacity to be added than expectation (4) Company is not able to maintain its ROE, ROCE, working capital days and EBIDTA margins.
Outlook & Valuation: At the upper end of the price band, Rossari demands PE multiple of 32.1x F.Y.20 fully diluted EPS. None of the listed chemical companies has the same business as Rossari. Its specialty chemical peers such as Galaxy Surfactants, Fine Organics, Aarti industries, Atul and Vinati Organics are currently trading at F.Y.2020 P/E multiples of 24.0x, 36.6x, 30.5x, 20.6x and 30.9x respectively. We believe Rossari will command premium over most of its chemical peers as it is net debt free as well as it has better asset turnover, working capital days, ROE and ROCE better than most of its peers. In the last three years Rossari have reported 32% and 66% revenue and PAT CAGR due to the strong promoter and management team. As we are positive on the future outlook for the industry as well as the company, we would recommend to "Subscribe" to the issue.