News Analysis

Bumper listing for Chemcon Speciality Chemicals

Keerthi Sanagasetti BL Research Bureau | Updated on October 01, 2020

Stock lists at 116% premium to the upper end of the price band

After the stellar listing of Happiest Minds Technologies and Route Mobile last week — that posted listing day gains of 123 and 86 per cent, respectively (from upper band of issue price) — Thursday had Chemcon Speciality Chemicals witnessing a a bumper listing.

Also read: IPOs chased by retail investors have lagged on returns

Riding the bandwagon of specialty chemical makers, the stock listed today at ₹730.95. This is more than double its issue price of ₹340 a share. The company’s shares touched an intra-day high of ₹744 on the Bombay Stock Exchange and an intra-day low of ₹592.

Post the stellar listing the stock now trades at nearly 56 times its FY20 earnings.

The shares seem overvalued after the gains. At the issue price, Chemcon was valued at about 26 times its FY20 earnings. While Chemcon has no direct listed peers (it is the sole manufacturer of certain pharma intermediates in India), the stock is expensive when compared to other large cap companies in the specialty chemicals space, such as Aarti industries and Atul. Currently these companies are trading in the rage of 38-29 times their trailing 12-month earnings.

Revenue streams

Also, unlike Chemcon, the larger and more established players have more diversified streams of revenue, yet are trading at lower valuations compared to Chemcon.

Also read: Chemcon public issue subscribed 150 times

Recently, another specialty chemical maker made a glamorous entry into the stock market — Rossari Biotech. With a market capitalisation of ₹4,165 crore, Rossari Biotech currently trades at about 64 times its FY20 earnings.

The listing day rally for both Rossari and Chemcon is a reflection of the oversubscription that both the IPOs received. While Rossari was subscribed more than 55 times the issue, Chemcon was oversubscribed nearly 150 times.

In the case of Chemcon, aside from the recently acquired euphoria around specialty chemical stocks, investors seemed to have relied much on the robust revenue and profit growth of the company in the past — up 29 and 36 per cent, respectively (CAGR), over FY18 to FY20. Another positive for the company is its strong return on equity — over 30 per cent.

These positives have weighed over the key risks of the stock, such as, stretched working capital cycle, mercurial prices of end products and pending litigations against the promoters of the company.

Chemcon’s ₹318-crore IPO consisted of an offer for sale worth ₹153 crore and a fresh issue of ₹165 crore. The proceeds from the fresh issue will be used for capacity expansion and working capital requirements of the company.

Published on October 01, 2020

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