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BL Research Bureau
Chemplast Sanmar Limited (CSL) opened its second innings with capital markets today, opening at ₹525 per share, a discount of 3 per cent to its IPO price of ₹541.
The stock inched up and was trading at ₹531 at 11:00 am. The stock is now valued at 17.4 times FY21 earnings compared to 17.7 times at the time of IPO (upper band), a 15 per cent premium to its closest competitor, Finolex Industries.
Even though Chemplast Sanmar valuations were in the reasonable range, we earlier recommended investors ascertain the level of disentanglement CSL achieves from its group companies before investing.
A large part of the IPO proceeds, both new issue (₹1,300 crore) and OFS (₹2,550 crore), should deleverage the company and the group obligations, which includes releasing the pledge on its recently merged group company - Chemplast Cuddalore Vinyls Limited (CCVL).
Without a significant discount to the IPO price, we reiterate a similar approach of watching the independent course that CSL charts as a listed entity before investing.
Business
CSL is part of India’s oldest business house based in South India, The Sanmar Group, which has interests in engineering, shipping and chemicals.
After delisting in the 2012 post-2008 crisis, CSL is now the largest manufacturer of speciality paste PVC resin and other allied products, along with a growing speciality chemicals business increasing its traction amongst international pharma and agrochem clients.
CSL also plans on an additional capacity of 35,000 tonnes in the paste PVC segment, significantly extending its dominance in this segment.
Financials
The net worth of CSL turned negative in FY21, not based on operational or cash losses, but because of restructuring, primarily in CCVL. The outstanding NCDs of ₹1,238 crore were raised in December 2019 at 17.5 per cent interest per annum directed towards investing in Sanmar Group International-SGIL(₹482 crore) and repayment of advances received from its promoter Sanmar Holdings Limited (SHL) (₹673 crore), with the remaining amount directed towards servicing its debt. CSL has redeemed its investments from SGIL in FY21 and another ₹979 crore in a JV with a group entity.
In FY21, even as CSL reported cash flow from operations of ₹1,076 crore and ₹2,151 crore from the redemption of investments in associates and JVs, repaying CCVL’s debt owed to group entities largely neutralised cash gains. Also, Sanmar Engineering Services Limited (SESL), which holds SHL, has secured a term loan of ₹1,220 crore by pledging the shares of CCVL before the acquisition. The pledge continues, and the proceeds from the offer for sale are expected to significantly decrease the debt and resolve the pledged shares.
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