Previous `listed track’, recurrent `scheme of arrangement’ and unscrupulous way of ejecting minority shareholders make it below investible grade.
Four consecutive years (2009-2012) of losses put the stock in the dumps and the company quickly went for delisting in 2012. When some minority shareholders refuse to surrender their shares, the company changed the face value from Re 1 to Rs 5,00,000 thereby converting the minority shares into `fractions’ which automatically ejected the small public shareholders from the company. After forcing the hapless minority shareholders out, the face value was changed from Rs 5,00,000 to Rs 10. Early this year, apparently to attract the new investors, the face value was further reduced to Rs 5! Does this not deserve to be in the `Risk Factor’? SEBI, are you listening?
| CHEMPLAST SANMAR OFFER AT A GLANCE | |
| Offer Type | Book Built |
| Platform | Main Frame |
| Fresh Issue | Rs 1,300 Cr (240.30 lakh shares) |
| Offer for Sale | Rs 2,550 Cr (471.35 lakh shares) |
| Face Value | Rs 5 |
| Price Band | Rs 530 – 541 |
| Mkt/Bid Lot | 27 Nos. |
| Implied M-Cap | Rs 8,554 Cr |
| Implied Equity Cap | Rs 79.05 Cr |
| Free Float | 45.01% |
| Lead Manager | ICICI Securities, Axis Capital, Credit Suisse, IIFL Securities, Ambit, BoB Capital, HDFC Bank, IndusInd Bank and YES Securies |
| Registrar | KFinTechnologies |
| Listing At | BSE, NSE |
| INDICATIVE ISSUE SCHEDULE | |
| Opening :10-Aug-2021 | Closing :12-Aug-2021 |
| Allotment :18-Aug-2021 | Refunding :20-Aug-2021 |
| Demat Credit :23-Aug-2021 | Trading :24-Aug-2021 |
The Offer
Chennai based Chemplast Sanmar Ltd, whose genesis dates back six decades, is vying for listing second time with an issue of Rs 3,850 cr. The offer consists of a fresh issue of Rs 1,300 cr from the company and an offer for sale (OFS) of Rs 2,550 Cr from the holding company (Rs 2463.44 Cr) and a group company (Rs 86.56 cr). The offer is being made through the book-building route with a price band of Rs 530-541 for Rs 5 paid-up share. The quantum of offer would be about 711 lakh shares which work out to 45% of the company’s proposed equity capital of Rs 79.05 Cr.
Applicants should bid for a minimum lot of 27 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE & NSE on August 24, 2021. As many as nine investment bankers (ICICI Securities, Axis Capital, Credit Suisse, IIFL Securities, Ambit, BoB Capital, HDFC Bank, IndusInd Bank and YES Securies) are acting as managers to the offer. Karvy’s new avatar KFin Technologies has been roped in as registrar to the issue. The bidding opens on Tuesday, August 10 and closes on Thursday, August 12, 2021.
Out of the fresh issue proceeds, the company proposes to utilize Rs 1,238.25 Cr for early redemption of high (17.5% p.a.) interest-bearing NCDs issued to Goldman Sachs India, Apollo Credit Holdings and Standard Chartered Bank (Singapore) in 2019. The balance issue amount is earmarked for general corporate purposes.
Lineage
Chemplast is not new to investing public. During the unprecedented scam-boom in 1992 the company’s shares were listed for the first time and the stock was active for twenty long years. The company’s massive expansion and diversification within a short span of time backfired and resulted in losses during the period 2009-2012. When the stock was in the dumps, the management decided to go for delisting and completed the formalities in mid June 2012.
Chemplast’s genesis starts with Chemicals and Plastics India Ltd (CPIL), which was incorporated in 1962 and reportedly commenced manufacture of PVC resins at Mettur in Tamil Nadu in 1967. CPIL acquired the shares of a leading caustic soda manufacturer, Mettur Chemical and Industrial Corporation Ltd (MCICL), in the year 1984. Another company, Urethanes India Ltd (UIL), was incorporated in 1985. Under a scheme of amalgamation, MCICL was amalgamated with CPIL in 1988.
In 1991, under another scheme of amalgamation CPIL was amalgamated with UIL and the latter’s name was changed to Chemicals and Plastics India Ltd (CPIL)! This company’s shares were listed on BSE and Madras Stock Exchange in the year 1992. CPIL changed its name to Chemplast Sanmar Ltd (Chemplast) in 1995 and immediately listed its shares on the NSE.
In 1997 CPIL expanded the PVC resin capacity to 60000 TPA. In 2003, it acquired the Caustic Soda facility at Karaikal from Kothari Petrochemicals Ltd. In 2007, it commissioned of the marine terminal facility and the EDC Plant at Karaikal. Same year, it also commissioned the project for conversion of the manufacturing process of Caustic Soda at Mettur from mercury to membrane. In 2009 the company commissioned the green field suspension PVC facility at Cuddalore, Tamil Nadu along with a captive marine terminal facility.
Nevertheless, after these expansions and diversifications the company faced a rough weather and posted continuous losses. Consequently, the stock lost nearly 75% on the trading floor and the company decided to delist its shares from the stock exchange in 2012.
Despite four consecutive years of losses, the company undertook a major CAPEX programme and expanded capacities at Mettur (of Paste PVC resin to 66,000 TPA) and Cuddalore (of Suspension PVC to 300,000 TPA) in the year 2013. Also, the company purchased the Hydrogen Peroxide plant and machinery from Asian Peroxides Ltd in 2017 and commissioned the same at Mettur in the year 2019. Same year, under a composite scheme of arrangement, the Coddalore suspension PVC undertaking was demerged and vested in Chemplast Cuddalore Vinyls Limited (CCVL) and Sanmar Speciality Chemicals Ltd was amalgamated with the company. Ironically, two years later, in 2021, CCVL was acquired by the company and it became a wholly owned subsidiary.
Promoter & Management
Chemplast not only had a penchant for scheme of arrangement and amalgamation, it also has a complex ownership. The offer document presents 1979-registered Sanmar Holdings Ltd (SHL) as promoter. SHL in turn is a wholly owned subsidiary of Sanmar Engineering Services Ltd (SESL).The natural person behind SESL is N Sankar who along with his brother Kumar founded the Sanmar (Sankar-Kumar) group.
SHL holds 98.8% of Chemplast’s capital and the balance 1.2% is directly held by SHL’s holding company, SESL, which is part of the `SHL Chemicals Group’, which in turn is a constituent of the Sanmar Group. Fairfax India Holdings Corporation (Fairfax) a well-known international investor led by Prem Watsa, based in Canada, has invested, through FIH Mauritius Investments Ltd, in the SHL Chemicals Group since 2016. FIH Mauritius holds 42.94% equity of SHL’s promoter SESL.
Strangely, none of the Sanmar family members is holding any executive position in Chemplast. N Sankar’s son, Vijay Sankar (48), is designated as Chairman and Non-executive Director. The managing director of CCVL since April 2020, Ramkumar Shankar (54), who is a qualified chartered accountant and a cost accountant, has been designated as Managing Director of Chemplast. Canada-based Chandran Ratnaswami (72), who is the chief executive officer of Fairfax India Holdings Corporation, a company listed on the Toronto Stock Exchange, is on the board as a Non-executive Director.
Business Segments
| Capacity | Utilization | |
| TPA | FY2021 | |
| Mettur Facility | ||
| Specialty paste PVC resin | 66000 | 91% |
| Caustic soda | 67000 | 64% |
| Chloromethanes | 35000 | 91% |
| Hydrogen peroxide | 34000 | 42% |
| Refrigerant gas | 1700 | 30% |
| Karaikal Facility | ||
| Caustic soda | 52000 | 36% |
| Cuddalore Facility | ||
| Suspension PVC resin | 300000 | 88% |
Financial Track
On a consolidated basis, Chemplast suffered in fiscal 2019 due to the demerger of its Cuddalore facility. But, notwithstanding the adverse impact of the pandemic, Chemplast has put up an impressive show for fiscal 2021 thanks to the acquisition of the Cuddalore subsidiary. Will this performance sustain or is it a pre-IPO bloom? Only time will tell us. If the track record of the management is any indication, one cannot be sure of the subsidiary remaining with Chemplast for long as it is more profitable than the parent company.
| Chemplast Sanmar Consolidated Financials (in Cr) | ||||
| Period Ended | Mar-21 | Mar-20 | Mar-19 | Mar-18 |
| Months | 12 | 12 | 12 | 12 |
| Revenue | 3799 | 1258 | 1254 | 3125 |
| Operating Profit | 1095 | 247 | 286 | 533 |
| OPM% | 28.8 | 19.6 | 22.8 | 17.1 |
| Other Income | 16 | 8 | 12 | 27 |
| EBIDTA | 1112 | 255 | 298 | 560 |
| EBIDTA % | 29.1 | 20.1 | 23.5 | 17.8 |
| Interest | 433 | 95 | 48 | 77 |
| Depreciation | 131 | 87 | 56 | 75 |
| Net Profit | 407 | 46 | 118 | 249 |
| Equity (Implied) | 79 | 67 | 67 | 80 |
| Reserves (Implied) | 4071 | 1845 | 1795 | 465 |
| Borrowing | 2025 | 1254 | 193 | 460 |
| Fixed Assets | 3158 | 2165 | 2204 | 1098 |
On a standalone basis, the parent company has more assets and borrowings. But, its turnover and profits are comparatively lower than its subsidiary. As a matter of fact, the standalone net profit is just 10% of the consolidated profit. Thus, on post IPO equity capital, the standalone EPS would be only about Rs 2.50 whereas the consolidated EPS would be more than Rs 25!
| Chemplast Sanmar Standalone Financials (in Cr) | |||||
| Period Ended | Mar-21 | Mar-20 | Mar-19 | Mar-18 | Mar-17 |
| Revenue | 1289 | 1259 | 1253 | 3125 | 3262 |
| Operating Profit | 375 | 314 | 332 | 496 | 431 |
| OPM% | 29.1 | 24.9 | 26.5 | 15.9 | 13.2 |
| Other Income | 6 | 8 | 17 | 22 | 29 |
| EBIDTA | 381 | 322 | 349 | 518 | 460 |
| EBIDTA % | 29.5 | 25.4 | 27.5 | 16.5 | 14 |
| Interest | 254 | 95 | 47 | 77 | 73 |
| Depreciation | 88 | 87 | 55 | 75 | 69 |
| Net Profit | 40 | 99 | 187 | 179 | 150 |
| Equity (Implied) | 79 | 67 | 67 | 80 | 80 |
| Reserves (Implied) | 3242 | 1910 | 1812 | 416 | 237 |
| Borrowing | 1184 | 1254 | 193 | 460 | 363 |
| Fixed Assets | 2113 | 2165 | 2204 | 707 | 1073 |
Valuation
Whereas the average cost of acquisition per equity share by the promoter and the selling shareholders works out to Rs 1.72 and Rs 30.14, the company has fixed a price band of Rs 530-541. Post offer for sale, SESL’s holding would be nil and SHL will have more than 8.69 crore shares at a negative cost of Rs 280.71 per share!
As compared to leading polymer peers in the listed domain, Chemplast’s price looks on the higher side. Ineos, whose UK associate is a technical partner to Chemplast, is discounted 9 times its net earnings and less than 6 times of EBIDTA. In terms of management quality and investor friendliness, one cannot rate Chemplast better than Ineos.
|
HOW CHEMPLAST COMPARES WITH POLYMER PEERS |
|||
|
Financials |
|||
| (Amount in Cr) |
Chemplast |
Bhansali Engg |
Ineos Styro |
| Market Cap |
8554 |
3344 |
2519 |
| Borrowing |
2025 |
0 |
33 |
| Fixed Assets |
3158 |
141 |
358 |
| Revenue |
3799 |
1292 |
1631 |
| Other Income |
16 |
10 |
13 |
| EBIDTA |
1112 |
457 |
427 |
| Interest |
433 |
1 |
15 |
| Net Profit |
407 |
334 |
280 |
| Equity Cap |
79 |
17 |
18 |
| Reserves |
4071 |
665 |
871 |
|
Stock Features |
|||
| Current Price (Rs) |
541 |
202 |
1433 |
| Face Value (Rs) |
5 |
1 |
10 |
| Book Value |
262 |
41 |
505 |
| Promoter Stake % |
55 |
56 |
75 |
|
Profitability |
|||
| OPM % |
28.8 |
34.6 |
25.4 |
| Net Margin % |
10.7 |
25.6 |
17.0 |
| Cash EPS |
34.01 |
20.74 |
179.83 |
| Earnings Per Share |
25.72 |
20.13 |
159.34 |
|
Return |
|||
| RONW % |
14.3 |
49.0 |
31.5 |
| ROCE % |
20.1 |
65.6 |
42.4 |
|
Discounting |
|||
| Price/Earnings |
21.0 |
10.0 |
9.0 |
| Price/Cash EPS |
15.9 |
9.7 |
8.0 |
| Price/Book Value |
2.1 |
4.9 |
2.8 |
| Price/EBIDTA |
7.7 |
7.3 |
5.9 |
| Price/Revenue |
2.3 |
2.6 |
1.5 |
| Price/Fixed Assets |
2.7 |
23.8 |
7.0 |
|
Distribution |
|||
| Dividend % |
0 |
100 |
100 |
| Yield % |
0 |
0.5 |
0.7 |
| Pay-out % |
0.0 |
5.0 |
6.3 |
Concern
- As per the offer document, the lease for the company’s Vedaranyam Salt Field expired on June 30, 2013 which is yet to be renewed!
- Promoter SHL’s holding company SESL has availed of a term loan of Rs 1,220 cr from HDFC secured by a pledge of 100% of the share capital of CCVL prior to the CCVL acquisition. CCVL Acquisition was approved by HDFC on the condition that the pledge will continue to be held by Chemplast. The pledge over the share capital of CCVL enables continuation of the term loan availed by SESL, and any default in respect of the repayment of the term loan could result in the invocation of the pledge by HDFC and a consequent disposal of Chemplast’s shareholding in CCVL by HDFC.