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Laxmi Organic Industries (Laxmi Organic), a three-decades old chemicals manufacturing company, is coming out with an initial public offering (IPO) comprising a fresh issue, and an offer-for-sale by company promoter, Yellow Stone Trust of equity shares, each of up to ₹300 crore. The company has raised ₹180 crore from anchor investors pre-IPO.
The ₹600-crore IPO will be open from March 15 to 17. The price band has been fixed at ₹129-130 per share.
The proceeds will be used for pre-payment/repayment of borrowings, and on the new fluorospecialty chemicals facility and expansion of the existing speciality chemicals facility.
Long-term investors can avoid the IPO.
Unattractive margins, valuations
According to a Frost & Sullivan Report, Laxmi Organic is among the largest manufacturers of ethyl acetate (acetyle intermediates) in India and enjoys around 30 per cent share in the Indian market. The company is also the sole manufacturer of diketene and diketene derivatives (speciality intermediates) in India with a market share of around 55 per cent in the Indian market.
However, Laxmi Organic’s overall operating profit (EBITDA) margins and net profit margins at 7.4-11.0 per cent and 4.6-5.5 per cent, respectively, between FY18 and FY20 are quite modest. The high-margin speciality chemicals accounts for only 28 per cent of the company’s revenue.
Impacted by higher raw material cost in FY19 and lower sales revenue in FY20, Laxmi Organic posted a year-on-year 1.3 per cent rise in FY19, followed by a 26 per cent decline in FY20 in operating profit. While the company delivered a strong financial performance in the six months ended September 2020, it needs to be seen if this is sustainable or not, given its lacklustre performance (FY18-FY20).
At ₹130 per share, the stock is not cheap. It trades at 45 times its FY20 earnings and at 32 times its annualised FY21 earnings. Note that, while FY20 was a year of under-performance, the half-year period ended September 2020 was one of outperformance and may not repeat. Many other chemical companies such as SRF, Alkyl Amines Chemicals, Aarti Industries, Balaji Amines, Galaxy Surfactants and Navin Fluorine International are trading at trailing twelve-month P/E multiples of 29 to 45 times. While the stock valuations are not cheap, all these companies enjoy significantly higher EBITDA margins compared to Laxmi Organic. SRF and Alkyl Amines which trade at 32 and 42 times, respectively, have also delivered better sales and operating profit growth numbers for FY19 and FY20.
Laxmi Organic Industries is foraying into the more lucrative speciality fluorochemicals (assets acquired from Miteni, Italy) and is also expanding its speciality chemicals manufacturing capacity. This could help the company improve its margins in future, something to look out for.
Business and risks
Laxmi Organic manufactures Acetyl Intermediates (AI) such as ethyl acetate, acetaldehyde and fuel-grade ethanol and speciality intermediates (SI) such as ketene and diketene derivatives. Laxmi Organic derives around 81 per cent of its revenue from manufacturing, 52 per cent from AI products and 28 per cent from SI products, and the rest from trading. As per the company, AI product EBITDA margins are in high single digit and those from SI products are over 20 per cent.
The company’s products find use in industries such as pharmaceuticals, agrochemicals, dyes and pigments and printing and packaging. With no single customer accounting for more than 10 per cent of its revenue, Laxmi Organic has low customer concentration. Apart from sales in India, Laxmi Organic supplies products across 30 countries. Exports of manufactured products accounted for 32 per cent (₹488 crore) of the FY20 consolidated revenue.
Modest revenue and profit growth
Laxmi Organic grew its consolidated revenue 14 per cent, year-on-year, to ₹1,569 crore in FY19. However, with a 35.5 per cent rise in raw material cost, the company’s EBITDA’s rose only 1.3 per cent to ₹153 crore the same year. Higher depreciation and finance cost dented net profit which declined 3.3 per cent to ₹72 crore in FY19. In FY20, revenue was down year-on-year 2.2 per cent to ₹1,534 crore and EBITDA declined 26 per cent to ₹114 crore. The company’s SI manufacturing facility had to be temporarily shut down due to heavy flooding. Thanks largely to lower tax expenses, net profit fell only 3 per cent to ₹70 crore in FY20. Note that, the slide in net profit would have been sharper but for the one-time investment-related incentives and tax refund of ₹25.6 crore.
Look out for the IPO analysis of Kalyan Jewellers, Nazara Technologies and Suryoday Small Finance Bank in the daily edition of BusinessLine this week
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