Concerns pertaining to small size, high working capital requirement and regional presence make Chemcel Biotech’s offer expensive.
Chemcel Biotech, an agro chemicals company, plans to raise Rs 24.64 crore through an IPO by offering shares at a fixed price of Rs 16 each. The company manufactures and supplies pesticide products used for different crops such as paddy, cotton, sugarcane, turmeric, chillies, pulses and vegetables. However, the company is a regional player with a presence in Andhra Pradesh. Also, it is relatively a small player with an annual turnover of Rs 24.57 crore, facing stiff competition from the unorganised as well as other large organised players like such as United Phosphorus, Rallies, Bayer Crop Science and Syngenta.
Although the industry has grown at about 3-4 per cent annually, given the company’s small base, its growth in revenues at merely 17.6 per cent over the last four years is nothing to write home about. Additionally, while climatic conditions can impact earnings of the industry, seasonality of the business (long credit period to farmers) is also a concern as it means high working capital requirement.
This is also evident from the company’s plan to further infuse Rs 9.45 crore towards working capital for expanding its agro chemicals business. Until now, the company has not been able to fully utilise its existing manufacturing capacities (utilisation in the three product categories has been low at 3-58 per cent), which can only be improved by infusing additional working capital.
While there are many concerns, the company is also not expecting the agro chemicals business to grow significantly. For now, the company plans to enter the promising bio-diesel segment, by manufacturing and supplying it to oil marketing companies. The latter use it for blending with oil (currently, blending level is five per cent) to reduce the overall cost of oil besides, providing green fuel to the country.
The company is setting up a crushing capacity of 20 tonne per day, which will be commissioned by June 2009 and will be fully operational by September 2009. The company will procure its raw material (including jatropha seeds, Pongamia, Neem, palm oil seeds and cotton seeds) from its subsidiary companies, where it is holding equity stakes to the extent of 65 per cent. With this facility, the company will be able to produce bio-diesel (300 litres per tonne of input) and other by-products such as glycerin (30kg per tonne of input) and cake (700 kg per tonne of input). Though the opportunity is large, it will partly reflect in revenues in FY10 and fully by FY11.
| BIODIESEL OPPORTUNITY | ||
| Per day | Per year | |
| Crushing capacity (tonne) | 1 | 7,200 |
| Conversion cost (Rs/litre) | 20 | 144,000 |
| Conversion cost (Rs total) | 20,000 | 144,000,000 |
| Bio-oil (litres) | 300 | 2,160,000 |
| Realisation (Rs/litre) | 25 | 25 |
| Realisation (Rs total) | 7,500 | 54,000,000 |
| Glycerine (kgs) | 30 | 216,000 |
| Realisation (Rs/kg) | 600 | 4,320,000 |
| Realisation (Rs total) | 18,000 | 129,600,000 |
| De-oil cake (kgs) | 700 | 5,040,000 |
| Realisation (Rs/kg) | 6 | 6 |
| Realisation (Rs total) | 4,200 | 30,240,000 |
| Total revenues | 29,700 | 213,840,000 |
| Gross margins | 48.5 | 48.5 |
In the near term, growth will emanate from agro chemicals but, in the longer term growth could come from the bio-diesel business. With regards valuations, the issue is expensive. At the offer price of Rs 16, the PE works out to 34 times its FY08 fully diluted earnings. Even after considering the future growth prospects (about 31 per cent, based on 10 per cent growth in agro chemicals business as well as revenues from the bio-diesel business) and estimated FY11 earnings of Rs 1.1 per share, the PE works out to 14.5 times.
Issue opens: September 9
Issue closes: September12