IPO Note February 22, 2011 Fineotex Chemicals SECTOR: CHEMICALS AVOID Issue Snapshot Issue Open: 23-Feb-11 Issue Close: 25-Feb-11 Price Band (INR) 60-72 Issue Size INR 252 mn- INR 303 mn Market Cap INR 673 mn-inr 808 mn Issue Size: 42,11,160 shares QIB: 21,05,580 shares Non-Institutional: 6,31,674 shares Retail: 14,73,906 shares Face Value (INR/share): 10 Book Value as of FY10 (INR) 21.51 Capital Structure: Pre Issue Equity (INR mn) 70 Post Issue Equity (INR mn) 112 Shareholding Pattern Pre-Issue (%) Post-Issue (%) Promoters & Promoter Group 99.99% 62.49% Others 0.01% 0.01% Public 0 37.50% Total 100% 100% Total Shares 7018600 11229760 Objects of the Issue Sr. No. Particulars INR mn 1 Setting up of new manufacturing facility 74.41 2 Sales Office at Mumbai 18 3 Working Capital Requirements 80 4 Public Issue Expenses [.] 5 General Corporate Purposes [.] Total [.] Website: www.fineotex.com Fineotex Chemical Ltd. (FCL) is in the business of manufacturing specialty chemicals and enzymes consumed by the textile and garment industry, leather, water treatment, construction, paper, paint, adhesives, agrochemical and other industries. FCL s existing plant, with an installed capacity of 5,000 MT/annum, is located at Mahape in Navi Mumbai. The company proposes to set up a new manufacturing facility, at Khopoli in Maharashtra, for the production of specialty chemicals and enzymes with a capacity of 13,125 MT/annum. Investment Rationale Manufactures over 100 Products FCL offers a wide range of specialty chemicals and enzymes used in many industries viz. Textiles & Garments Processing namely the Pre-treatment, Printing, Dyeing and Finishing Process. It also offers specialty performance chemicals to the Leather, Agrochemicals, Construction, Water Treatment, Wood, Sticker and Adhesive Industries etc. Strategic Location of manufacturing Facility FCL procure raw materials from indigenous manufacturers in India like Godrej Industries Limited, Andhra Petroleum Limited, Travancore Titanium Product Limited, etc. who have their warehouses located in close proximity to FCL s manufacturing units. This gives FCL an edge for timely and cost efficient delivery. Investment Concerns Expected delay in the project FCL s inability to acquire the land at Khopoli at the right time, can delay the project or result in an increase in the cost of acquisition; thereby resulting in an increase in the project cost or time overrun thus affecting their operations and profitability. Valuation & Recommendation On the post issue FY10 EPS, the shares are offered at a P/E of 18.6x and 22.3x on lower & upper price band respectively which is higher compared to its peers. Considering the risk involved (as the company is yet to complete the land acquisition process and has client concentration risk) and higher valuation, we recommend AVOID to the issue. Neeraj Toshniwal neeraj.toshniwal@spagroupindia.com
Investment Rationale Expansion Plans FCL propose to set up a manufacturing facility for the production of Specialty Chemicals with a capacity of 13,125 MT/annum in and around Khopoli in Maharashtra and to set up a sales office at Mumbai. Setting up this project would be a step towards expansion of current business i.e. manufacturing of Specialty Chemicals for Construction, Textile & Garment, Leather and Water Treatment Industry. This expansion would help FCL to tap the potential of the increasing demand of the specialty chemicals in the above industries. The proposed production unit (in and around Khopoli) will emphasize on having major production quantity under one roof. Also, being geographically located close to Mumbai, JNPT Seaport & Bhiwandi this unit will have proximity and easy access to match supplies & decrease the time for transport of Raw Material & finished goods. The necessary amenities like water; infrastructure being available is an added advantage. Expansion Plans Schedule Particulars (A) Setting up of New Unit Expected start Expected completion Acquisition of land - Apr-11 Execution of Building erection work Jul-11 Sep-11 Installation of P&M Sep-11 Oct-11 Commencement of Prod. & Sales Feb-12 - (B) Setting up of Sales Office Identification & Acquisition of property Apl-11 May-11 Setting up of Furniture & Fixtures Jun-11 Aug-11 Commence Operations Sep-11 - Manufactures over 100 Products of Speciality Chemicals FCL offers a wide range of specialty chemicals and enzymes used in many industries viz. Textiles & Garments Processing namely the Pre-treatment, Printing, Dyeing and Finishing Process. It also offers specialty performance chemicals to the Leather, Agrochemicals, Construction, Water Treatment, Wood, Sticker and Adhesive Industries etc. Company Background Fineotex Chemical Ltd. (FCL) is in the business of manufacturing specialty chemicals and enzymes consumed by the textile and garment industry, leather, water treatment, construction, paper, paint, adhesives, agrochemical and other industries. FCL s existing plant, with an installed capacity of 5,000 MT/annum, is located at Mahape in Navi Mumbai. FCL manufactures over 100 products for various Industries. FCLmajor customers include Pidilite Industries Limited, Croda Chemicals India (P) Limited (formerly ICI India Limited), Rashtriya Chemicals & Fertilizers Limited, The Bombay Dyeing & Mfg. Co. Limited., Raymond Group, and others. Other reputed clients include Grasim Industries Limited, Clariant Chemicals India Limited, JCT Limited etc. Through merchant Exporters it reach in many countries in the world. Key Concerns Expected delay in the project FCL s inability to acquire the land at Khopoli at the right time can delay the project or result in an increase in the cost of acquisition; thereby resulting in an increase in the project cost or time overrun thus affecting their operations and profitability. Competitive environment FCL operate in a very competitive environment as their products are produced by a large number of other manufacturers in India and abroad. Players in this market generally compete with each other on key attributes such as technical competence, quality of products and services, pricing and track record. Customer Concentration risk For FY10, percent of Net Sales contribution from top 5 customers accounted for 56.42% of their total net sales, increasing from 44.79% in FY09 & 31.38% in FY08. 2
Industry Background CHEMICAL INDUSTRY Global Chemical Industry The Global Chemical Industry, estimated at US$ 2.4 tn, is one of the fastest growing sectors of the manufacturing industry. According to industry reports the pharmaceutical segment contributes approximately 26% of the total industry output and approximately 35-40% is dominated by the petrochemical segment. Commodity chemical is the largest segment in the chemicals market with an approximate size of $ 750 bn while the Specialty and Fine Chemicals segment accounts for $ 500 bn. Some of the major markets for chemicals are North America, Western Europe, Japan and emerging economies in Asia and Latin America. The US consumes approximately one-fifth of the global chemical consumption whereas Europe is the largest consumer with half the consumption. The US is the largest consumer of commodity chemicals whereas Asia Pacific is the largest consumer of agrochemicals and fertilizers. Indian Chemical Industry The chemical industry includes basic chemicals, petrochemicals, fertilizers, paints and varnishes, gases, soaps, perfumes and toiletries and pharmaceuticals and is one of the most diversified of all industrial sectors covering thousands of commercial products. Its contribution to the GDP of the country is around 3 per cent. Broadly, the share of basic, knowledge, and specialty chemicals is 57%, 18%, and 25%, respectively. The chemical industry is an important constituent of the Indian economy with an estimated turnover at around US$ 35 bn, constituting 1.5% of the global chemical industry estimated at US$ 2400 bn. The total investment in the sector is nearly US$ 60 bn and the employment is about one million. It accounts for 13% 14% of total exports and 8% 9% of total imports of the country. Specialty Chemicals Main specialty chemicals are rubber chemicals, water treatment chemicals, polymer additives, lubricating additives, specialty pigments etc. These chemicals are mainly based on organic chemicals. Globally the contribution of specialty chemicals is upto 25% of the chemical sector i.e. it is approximately worth US$ 453 bn. The average annual growth is expected to be 7.5%. In India, the capacity of specialty chemical is 5272 thousand MTs and production is approx. 3690 thousand MTs. Valuation & Recommendation On the post issue FY10 EPS, the shares are offered at a P/E of 18.6x and 22.3x on lower & upper price band respectively which is higher compared to its peers. Considering the risk involved (as the company is yet to complete the land acquisition process and has client concentration risk) and higher valuation, we recommend AVOID to the issue. 3
Financials Income Statement (INR mn) FY08 FY09 FY10 H1FY11 Balance Sheet (INR mn) FY08 FY09 FY10 H1FY11 Income from Operations 296.4 252.7 207.5 133.9 Share Capital 70.2 70.2 70.2 70.2 Inc/(Dec) in Inventory 0.0-1.2 3.3-0.6 Reserves & Surplus 32.2 52.8 80.8 102.3 Operating Expenditure 237.0 203.4 162.9 101.5 Networth 102.4 122.9 151.0 172.4 Other Income 2.3 3.4 7.1 1.6 Borrowed Funds 0.5 14.6 EBITDA 59.4 48.1 47.9 31.7 Def. Tax Liability 0.7 1.7 2.5 2.8 EBITDAM% 20.0% 19.0% 23.1% 23.7% Current Liabilities & Provisions 67.9 41.0 36.0 46.8 Depreciation 0.9 0.9 1.3 0.7 Total Liabilities 172.0 180.0 189.0 222.0 EBIT 58.5 47.3 46.6 31.0 Operating Profit 61.6 51.5 55.0 33.3 Net Block 27.5 35.0 34.9 34.5 OPM% 20.8% 20.4% 26.5% 24.9% Capital WIP 6.8 7.6 8.1 4.7 Financial charges 0.3 0.4 0.2 0.1 Investment 0.0 20.2 35.1 55.6 PBT 60.4 50.3 53.6 32.5 Current Assets 137.2 117.6 111.4 127.4 Tax 22.8 19.0 17.5 11.0 Total Assets 172.0 180.0 189.0 222.0 PAT 37.7 31.3 36.1 21.5 Extraordinary Items 1.1-2.4 0.0 0.0 APAT 38.7 28.8 36.1 21.5 PATM% 13.1% 11.4% 17.4% 16.1% Cash Flow Statement (INR mn) FY08 FY09 FY10 H1FY11 Ratios FY08 FY09 FY10 Debt/Equity (x) 0.00 0.12 - Cash Flow from Operating Activities -7.0 11.7 38.4 18.4 ROCE (%) 59.0% 36.8% 35.6% Cash Flow from Investing Activities -6.5-36.6-9.4-19.4 Cash EPS (INR) 5.64 4.23 5.33 Cash Flow from Financing Activities 30.6 5.5-23.0 0.0 BV/Share (INR) 14.59 17.52 21.51 P/BV at 72(x) 4.93 4.11 3.35 Net Cash Flow 17.1-19.3 5.9-1.1 RoNW (%) 37.8% 23.5% 23.9% Opening Cash 0.1 21.7 2.4 8.3 EPS (INR) 5.52 4.11 5.15 Closing Cash 21.7 2.4 8.3 7.3 P/E at 72(x) 13.04 17.53 13.98 Peer Comparison *Pre Issue Figures Company CMP (INR) M-Cap (INR mn) M-Cap/Sales(x) Sales (INR mn) EPS (INR) P/E (x) BVPS (INR) P/BV (x) Fineotex Chem@60 60 1537 7.41 207.47 3.23 18.59 13.48 4.45 Fineotex Chem@72 72 1695 8.17 207.47 3.23 22.29 13.48 5.34 BSAF Ltd. 479.8 19561.44 1.20 16269.90 23.56 20.36 206.75 2.32 Clariant Chemicals India 699.75 18655.86 2.02 9243.26 40.36 17.34 130.26 5.37 Pidilite Ind 144.2 72984.61 3.33 21915.61 5.43 26.57 17.23 8.37 *EPS & BVPS are calculated using post issue shares 4
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