Chemcel Biotech ends at 68% discount over IPO price

At Rs 5.15 on BSE as against issue price of Rs 16

Chemcel Biotech settled at Rs 5.15 on BSE, a discount of 67.81% against issue price of Rs 16.

On BSE, 1.69 crore shares changed hands on the Chemcel Biotech counter. The stock hit a high of Rs 16 and a low of Rs 4.75. The stock debuted today at Rs 16, the same level at which it had priced the initial pubilc offer (IPO).

The fixed price offering, priced at Rs 16, ended on 12 September 2008 with 1.83 times subscription. It received applications for 2.53 crore shares, as against the net issue of 1.38 crore shares offered.

Chemcel Biotech, engaged in manufacturing of agrochemicals and planning to expand into bio-diesel business, entered the capital market with an initial public offering of 1.54 crore equity shares of Rs 10 each at a premium of Rs 6 per share.

As a part of its expansion plans, Chemcel proposes to set up a bio-diesel manufacturing plant at a cost of Rs 10.95 crore at Kondapalli near Vijaywada, Andhra Pradesh, with a capacity of 20 tonnes per day (tpd) of three shifts. It will also meet additional working capital needs on account of increased operations for the agrochemical & bio fertilizer division at Rs 9.45 crore.

Chemcel Biotech's net profit rose 30.9% to Rs 1.23 crore on a 5.3% increase in sales to Rs 24.58 crore in the year ended March 2008 over the year ended March 2007.

Grey Market Premiums - 20 Microns

20 MICRONS Ltd. 50 to 55 5 to 7

Chemcel Biotech Ltd. 16 3 to 4

Chemcel Biotech IPO Analysis

Chemcel Biotech (CBL) is a Hyderabad-based regional agrochemicals and pesticide formulator with 34 product registrations to manufacture pesticides for crops such as paddy, cotton and sugarcane. The company, incorporated on 29 September 1995, is promoted by K. Bala Krishna Rao, K. T. Vijay Kumar and KCS Prasad.

Production unit is in Kanuru, Vijayawada in Andhra Pradesh. This facility has semi-automated granule sections, semi-automatic liquid lines, chemical resistant reactors for insecticides. Distributors and dealers network is spread over five districts of Andhra Pradesh. The 18 distributors in these regions have access to a chain of 350 direct dealers and 550 retailers. The reach is to be expanded to the entire state over the next 12 months.

A biodiesel manufacturing unit is proposed at Kondapalli near Vijayawada, Andhra Pradesh, to diversify into biodiesel. The 6,000-tonne per annum biodiesel plant would process 20,000 tonnes of jatropha oil seeds every year. A 60% subsidiary, Jetro Petro Biotech, has entered into long-term contracts with 179 farmers for growing jatropha plants spread over 2,000 acres.

Commercial production from this biodiesel plant is expected to commence by September 2009. Around 40% of the IPO proceeds of Rs 24.64 crore are to be utilized to fund the above project. Another 40% of the IPO proceeds will be used to meet the working capital needs and the remaining 20% to repay part of its outstanding loans.

The bio-diesel manufacturing unit would cost Rs 10.95 crore. Of this, over Rs 1 crore has already been invested. The additional working capital requirement amounts to Rs 9.45 crore and the short-term loan to be paid back is Rs 3.86 crore.

Strengths

• Higher oil prices and favourable government policies towards biodiesel blending.

Weaknesses

• The agro-chemicals industry depends to a large extent on monsoons as well as the growth in the agricultural sector. Lack of product differentiation and absence of pan-India presence give rise to risks arising from agro-climatic conditions.
• The industry is characterised by high working capital requirement due to its seasonal nature and long credit period given to farmers. The limited scale will exert extreme pressure due to high inventories during off-season period.
• The small size of operation acts as a potential bottleneck in the foray into biodiesel due to the uncertainty associated with the availability and prices of jatropha oilseeds.
• Promoter K. T. Vijay Kumar and the company are fighting court cases against various allegations by Rallies India. The promoter is a former employee of Rallies.
• Post-IPO promoter stake will be low at 29.4%.

Valuation

The issue comprises a fresh issue of 1.54-crore equity shares of face value of Rs 10 each at a fixed price of Rs 16 per share. At the price of Rs 16 per equity share of Rs 10 each, the PE multiple is 33.8 times based on the earning per share of Rs 0.5 for the year ended March 2008 on post-IPO equity. Considering the limited scale of the operations as well as regional presence, the asking price is very high. Diversification into bio-diesel will start contributing to the top line only after September 2009. Insecticides India, with a much larger product portfolio, a pan-India presence and good exports, is trading at a trailing twelve-month (TTM) PE multiple of just 4 times. The sector trades at a TTM PE multiple of 6.1 times.

Grey Market - 20 Microns, Chemcel Biotech

20 MICRONS Ltd. 50 to 55 7 to 9

Chemcel Biotech Ltd. 16 4 to 5