Aster Silicates IPO Analysis

Aster Silicates is promoted by Mahesh A. Maheshwari and Namrata M. Maheshwari. It is engaged in the business of manufacturing of sodium silicate, which includes food-grade sodium silicate, special drilling grade silicate and detergent grade silicate. Currently, it operates from two units in Gujarat with aggregate installed capacity of 150 tonnes of glass per day. Unit I at Kheda has a capacity of 100 tonnes of glass per day and Unit II at Bharuch has a capacity of 50 tonnes of glass per day.



Sodium silicate is an intermediate product for the personal care industry. Sodium silicate finds its applications in toothpaste, gels, washing powders, and soaps. Swapna Chemicals, Baroda, Saibaba Chemicals, and Nenco Chemicals are some of its closest competitors. However, all of them are unlisted entities. As such published data on the industry, peer group and performance are not available.

Major raw materials required to produce sodium silicate are soda ash and silica sand. Soda ash is available in plenty throughout Gujarat and silica sand is available freely from the nearby silica mines from local contractors. However, manufacturers are gradually moving from soda ash to caustic soda because of 1) high soda ash prices, 2) caustic soda is a superior raw material compared to soda ash, 3) caustic soda is a better reactive agent than soda ash and, hence, there is savings in fuel costs, and 4) caustic soda is available from major suppliers within short distance of the Bharuch unit.

The company intends to enter capital market to raise Rs 53.10 crore by issuing around 0.47- 0.45- crore equity share of face value of Rs 10 each in a price range of Rs 112 to Rs 118 per share. The company is raising this money for expansion of its Bharuch manufacturing facilities by adding a 300-tonne facility to manufacture sodium silicate and additional working capital requirements. After expansion, the total capacity shall increase to 450 tonnes per day from current 150 tonnes per day. The project is to be completed by January 2011.

The company expects capacity utilization of 83.3% in FY 2011, FY 2012 and FY 2013. The company's capacity utilization was 86.6% in FY 2010.

Strengths

Sodium silicate mostly caters to the FMCG sector, which has a steady growth rate based on the growing domestic economy.

Weaknesses

The industry is highly competitive and fragmented. There are a number of fringe and small players offering similar products.

As of March 31, 2010, top 5 clients accounted for 83.08% of the company's turnover, and it expects the top 5 customers to generate more than 80% of its revenues in the next 3-5 years. However, the company intends to bring down its exposure to the top 5 clients to a level of 60% of its revenue in 5-8 years.

The company issued 0.33-crore equity shares to the promoter group at issue price of Rs 10 in the last one year.

Valuation

The company is targeting to raise Rs 53.1 crore at a price band of Rs 112-118. A number of new equity shares at the lower price band of Rs 112 works out to be 47 lakh and at the higher price band of Rs 118 to be 45 lakh. At issue price of Rs 112-118, EPS for the year ended March 2010 is Rs 2.9-3.0 resulting in PE of 38.6-39.3. There is no listed peer company. However, TTM PE of the inorganic chemical sector is 9.9. Thus, the issue is highly priced.