Chemplast Sanmar

Verdict: Pledge dulls the Prospects

Rs. 3,850 cr IPO:

• 2/3^rd is OFS by promoter (100% stake to fall to 55%)
• 1/3^rd fresh issue to pare Rs. 1,373 cr net debt by Rs. 1,238 cr, bearing 17.5% p.a. interest rate 

IPO Date: Tue 10^th Aug to Thu 12^th Aug 2021

Price band: Rs. 530-541 per share

Mcap: Rs. 8,550 cr, implying 45% dilution

Listing: 24^th Aug 2021

Chennai Based Specialty and Commodity Chemicals Company

4 key business divisions:

1. Suspension PVC (through wholly owned subsidiary CCVL): #2 player in India, with 20% market share, 3 lakh TPA capacity, to rise by 10%, by FY22-end, on Rs.20 cr capex, 88% current utilization. This commodity chemical accounts for 66% of Rs. 3,800 cr FY21 revenue and 60% of Rs. 977 cr EBITDA
2. Specialty paste PVC resin: #1 player in Indian duopoly market, 66 KTPA capacity to rise by 50% by FY24, on Rs. 256 cr capex, 91% utilization, contributes to 20% of company revenue
3. Custom manufacturing of starting material and intermediates for exports: Rs. 340 cr capex planned till FY24, accounts for 5% revenue
4. Caustic soda, hydrogen peroxide, chloromethanes: 10% of revenue

Huge Margin Jump in FY21

Company acquired commodity chemicals business, historically fetching 10-12% EBITDA against its own 26-28% specialty chemicals margin, in FY21. Margins for this acquired business jumped to 23% in the covid year, on industry-wide higher realization. EBITDA margin for the combined business rose to 26% over historic average of 16-17%. However, long-term sustainability of these margins is to be monitored.

FY21 PBT stood at Rs. 413 cr, while one-offs lead to PAT of Rs. 410 cr and EPS of Rs. 30.6. For FY22E, similar EPS may be clocked on interest savings, due to  repayment of high-cost NCD and deferred tax credit.

Peer Comparison

Chemplast’s FY21 EV/EBITDA and PE multiples work out to 9x and 18x respectively, which are quite aggressive. Peer Finolex Industries clocked Rs. 3,500 cr topline and 31% EBITDA margin in FY21, with Rs. 976 cr PBT, more than double Chemplast’s Rs. 413 cr. Finolex is ruling at an EV/EBITDA multiple of 9x and PE multiple of 15x, making IPO valuation quite stretched.

Pledge and Inter-Corporate Guarantee

1. Chemplast Sanmar’s 100% ownership in CCVL is pledged to secure Rs. 1,220 cr term loan for the ultimate parent company Sanmar Engineering Services Limited. Any default by Sanmar Engineering, which has been reporting Rs. 300 cr net loss annually during FY18 to FY20, may lead to company’s loss of control of the subsidiary, having clocked Rs. 267 cr PAT in FY21. Sanmar Engineering is selling its Rs. 865 cr holding in Chemplast Sanmar in the OFS, but that may not be sufficient to pay-off the entire loan. Thus, Chemplast Sanmar’s incoming investors carry a risk, if another company (and not Chemplast) defaults, without enjoying any upside.
2. Promoter Sanmar Holdings and ultimate parent Sanmar Engineering have provided USD 1.9 billion corporate guarantee/ letter of comfort for debt, taken by Egyptian loss-making group company TCI Sanmar Chemicals, which has been restructured.

This probably explains the huge 40% dilution, being undertaken in the IPO, comprising a massive Rs. 2,550 cr OFS by promoter. The IPO appears a desperate measure given group’s leverage. But there’s many a slip between the cup and the lip, and group-level debt has been the reason for a lot of corporate distress in the past. Like for example, Shapoorji Pallonji Group’s Sterling & Wilson Solar bore the brunt of excess parent debt, despite raising funds from IPO to pare leverage.

Conclusion

Let the group leverage be addressed before taking any fundamental business view. Besides, valuation also doesn’t leave anything on the table. Hence, the IPO is not recommended.

Grey Market Premium (GMP) of Chemplast Sanmar: Grey Market Premium of Chemplast Sanmar is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.

Disclosure: No Interest.