Omkar Speciality Chemicals is entering the capital market on 24th January 2011 with a public issue of 81 lakh equity shares of Rs.10 each, in the price band of Rs. 95 to Rs.98 per share, aiming to raise Rs. 77-79 crore. The issue, comprising of 41.27% of the company's post issue paid-up capital, closes on 27th January 2011.
The company is engaged in manufacture of organic, inorganic and intermediates at manufacturing plants in Badlapur at Thane, Maharashtra. The present capacity is 750 MTPA, which is proposed to be increased over five-fold to 3,650 MTPA, upto September 2012, with investment of Rs. 47 crore. Of this, 200 MT worth expansion, funded through internal accruals, is likely to commence commercial production in March 2011.
The company is a tiny speciality chemicals player aiming to undertake aggressive expansion. It mainly caters to the pharma industry, which accounts for close to 80% of revenue mix. The company has high dependence on its key client, Dr. Reddy's Lab, through which, over 20% sales were generated in FY10. Top 10 clients also accounted for about 58% of total sales, indicating high concentration of business in few hands.
Funds raised via IPO, besides funding above-mentioned expansion, will go towards meeting working capital requirement to the tune of Rs. 10 crore, while balance will be used towards general corporate purposes. Post-issue, equity will expand to Rs.19.63 crore, which is considered very high, given the scale of company's operations, from the present Rs. 11.53 crore. Also, the heavy promoter dilution to the tune of 41.27% is not seen in positive light.
As capacity increases, additional bank financing for Rs. 28 crore will be secured, which will put pressure on the already leveraged balance sheet. As on 30-Sep-10, company had networth of Rs. 20.5 crore and total debt of Rs. 34 crore, leading to a debt-equity ratio of 1.65:1.
For FY10, company reported consolidated sales of Rs. 68 crore and earned net profit of Rs. 5.1 crore, resulting in an EPS of Rs. 4.45. In H1 FY11, sales increased to Rs. 55 crore, partly due to rise in sale of traded goods of Rs. 7 crore, from Rs. 3 crore in FY10. Net profit in H1FY11 rose to Rs. 5.1 crore, leading to half-yearly EPS of Rs. 4.38. If we were to extrapolate the first half performance for the whole year, expected EPS for FY11 amounts to around Rs. 9.
At the upper end of the price band of Rs. 98, share is being issued at a PE multiple of over 11 times, which is ridiculously expensive for a small speciality chemicals player. The company is seeking a market cap of close to Rs. 192 crore (at upper band), having a sales run-rate of Rs. 110 crore, indicating price to sales multiple of 1.75x. This is unheard of in the chemicals industry.
Leading MNC player like BASF India, being debt-free, and with expected FY11 sales of over Rs. 2,500 crore and net profit of about Rs. 185 crore, is ruling at a market cap of Rs. 2,400 crore, resulting in price to sales multiple of 0.9x and PE multiple of 12.5x. Taking this as a benchmark, Omkar Speciality does not deserve a PE multiple even half of BASF, which is an MNC market leader, been in existence for many years.
Issue being grossly overvalued, we recommend caution and rate an 'avoid' on the issue.