Rossari Biotech IPO: Why Covid-19 outbreak may be positive for the company

The financial year 2020-21 (FY21) is set to see its first initial public offering with Rossari Biotech’s IPO going live today. The IPO is set to break a four-month dry spell in the primary market as business activities remained largely suspended due to Covid-19-induced nationwide lockdown.

The offer will stay open till Wednesday, July 15, and the company aims to mop up approximately Rs 500 crore at the upper end of the price band of Rs 423 – Rs 425 per share.

The specialty chemical company is offering a mix of fresh issue and offer for sale (OFS). Promoters Edward Menezes and Sunil Chari will offload 5.25 million equity shares each, taking the total OFS at 10.5 million equity shares. Meanwhile, the fresh issue component stands at Rs 50 crore. Each share will have a face value of Rs 2 with bid lots available in 35 shares and in multiples thereof.

The offer will be open to qualified institutional buyers (QIB) for 50 per cent of the offer; to non-institutional buyers for 15 per cent; and to retail investors for 35 per cent. The company is expected to get listed on the BSE and NSE on July 23.

Covid-19, India-China stand-off key positives

At a time when most of the businesses are struggling to survive amid the Covid-19 pandemic, the company’s home, personal care and performance chemicals (HPPC) segment provided it cushion against the slowdown blues.

“Manufacturing of disinfectants and sanitizers as part of the HPPC segment led the company’s products to get categorised under essential goods. Therefore, the manufacturing facility at the Silvassa unit was not shut down… Due to the Covid-19 pandemic, import of a few raw materials were restricted but were substituted with domestic suppliers in time without impact on continuity of operation,” the company said in its red herring prospectus.

At the end of FY20, HPPC accounted for nearly 47 per cent of its revenues, up from 38 per cent in FY19, and just 18.6 per cent in FY18.

Banking on this, analysts at Choice Broking remain positive on the company’s prospects on hopes that India could compete with China to become a global manufacturer in the post Covid-19 era. “The likely import ban after the recent Indo-China border skirmish makes the specialty chemicals sector a good investment bet,” says Rajnath Yadav, research analyst at the brokerage. He has a ‘Subscribe with caution’ rating for the stock.

Other business segments

Apart from personal care products, Rossari Biotech offers products under textile specialty chemicals, and animal health and nutrition products (AHNP). They accounted for 44 per cent, and 9.5 per cent, respectively, of total revenue at the end of FY20.

 “Due to rising demand for hand sanitisers, disinfectants, cleaning chemicals manufactured by Rossari Biotech, its business performance has boomed… Considering its debt-free status (post-issue), diversified product portfolio with sharp capacity expansion with low leverage coupled with strong margin and best fixed assets turnover ratio, we have a positive outlook on the company’s growth prospects,” note analysts at Arihant Capital. The brokerage has assigned a ‘subscribe’ rating to the offer.

Should you subscribe?
 

With a market cap of about Rs 2,210 crore, analysts at Motilal Oswal Financial Securities Ltd (MOFSL) value the firm’s P/E multiple at 33.8x, which is largely in-line with peers like Aarti Industries (30.9x), Atul Ltd (20.9x), Vinati Organics (31.3x), Fine Organics (36.4x), and Galaxy Surfactants (24.3x).

Besides, as per the financials at the end of FY20, Rossari Biotech’s debt to equity ratio is at 0.2, compared to Galaxy Surfactants’ 0.3 and Aarti Industries’ 0.6.

“At the higher end of the price band, the issue is valued at 33.8x FY20 P/E (fully diluted). While this may appear high, we like the company given its strong financial performance, lean balance sheet, and doubling of capacity over next one year which will drive future growth. Hence, investors can subscribe to the IPO from a long term perspective,” says Sneha Poddar, research analyst at MOFSL. “Further, considering the market conditions and bright prospects for specialty chemical space, one may also get listing gains,” she adds.

The company’s revenue from operations grew from Rs 299 crore, as on March 31, 2018 to Rs 600 crore at the end of FY20. Meanwhile, the net profit jumped from Rs 25.4 crore to Rs 65.25 crore during the period. It’s EBITDA at the end of FY20 stood at Rs 104.53 crore

For Nav Bhardwaj and Bhawana Israni, research analyst at Anand Rathi Shares and Stock Brokers, the stock is valued at ~19.9x EV/EBITDA and ~33.1x P/E on FY20 figures at the higher end (Rs 425 a share) of the issue band. Besides, Galaxy, Atul and Fine organics trade at FY20 P/E multiples of 24.3x, 20.7x and 36.3x, respectively, while Aarti Industries and Vinati Organics trade at 30-31x. This, they believe, is within the range of the sector average. They give a ‘subscribe’ rating to the stock.

Keshav Lahoti, research analyst at Angel Broking, however, says that slowdown in demand especially from textile industry; dependence of revenue on top 5 customers (which contributed 43.9 per cent of revenue for FY20; delay in addition of new capacity or lower utilization ratio of new capacity; and inability of the company to maintain its RoE, RoCE, working capital days and EBIDTA margins, may pose as key risks for the company.

Despite this, he believes Rossari Biotech will command a premium over most of its chemical peers “as it is net debt free as well as it has better asset turnover, working capital days, RoE and RoCE better than most of its peers”. He, too, has a ‘subscribe’ rating on the stock.