Should investors subscribe to Chemplast Sanmar IPO? Here's what analysts say

The initial public offering (IPO) of Chemplast Sanmar, a specialty PVC paste resin manufacturer, opens today at a price band of Rs 530-541 per equity share.

The Rs 3,850-crore public offer, which will close on August 12, comprises a fresh issue of shares worth Rs 1,300 crore and an offer for sale of shares worth Rs 2,550 crore by promoters Sanmar Holdings and Sanmar Engineering Services. At present, the company is 100 percent owned by the promoters.

Chemplast Sanmar, on August 9, already raised over Rs 1,732 crore from anchor investors ahead of its initial share sale. The company has decided to allocate 3,20,24,029 equity shares to anchor investors at Rs 541 apiece, valuing the transaction to Rs 1,732.5 crore, according to a circular uploaded on the BSE website.

The company is engaged in the manufacturing of specialty paste PVC resin, starting materials, and intermediates for agro-chemical, pharmaceuticals, agro-chemical, and fine chemical sectors. It also produces other types of chemicals such as Caustic Soda, Chlorochemicals, Hydrogen Peroxide, Refrigerant gas, and Industrial Salt.

It has four manufacturing facilities, among which, three are situated in Tamil Nadu, while one is located in Puducherry at Karaikal.

In 2012, Chemplast Sanmar had voluntarily delisted when its market cap was Rs 1,150 crore. Nearly a decade later, the company now expects a market valuation of Rs 8,500 crore.

However, Chemplast Sanmar’s share pledges and high debt level is seen as an overhang and experts have maintained caution on the IPO.

Jyoti Roy - DVP- Equity Strategist, Angel Broking raised concerns over the company’s high debt and negative net worth.

“At the higher end of the price band, the stock will be trading at P/E multiple of 17.7xFY21 EPS which is at a discount to other chemical players. However we have a Neutral recommendation on the IPO given our concerns due to high debt on books and negative net worth,” Roy said.

Religare Broking believes that Chemplast Sanmar is well-positioned to benefit from the industry growth trends given its diversified product portfolio which diminishes the risk associated with any particular product, vertically integrated manufacturing facilities and strong parental support.

Further, given the strong demand for its products, the company intends to increase production capacity. This will aid in generating higher revenue as well as de-bottlenecking, which would lead to better-operating efficiencies, it said.

“On the financial front, its joint ventures and associate company are posting losses from last 3 years, which remains a concern. Nonetheless, we have a positive view of the company from a long term perspective,” said Religare Broking.

Chemplast Sanmar intends to utilise the proceeds from the offer for early redemption of NCDs issued by it for full and general corporate purposes.