Failure in complying with SEBI, Stock Exchange and Companies Act guidelines exposes the quality of management!
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ARCHEAN CHEMICAL OFFER AT A GLANCE |
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| Offer Type | Book Built |
| Platform | Main Frame |
| Offer Size | Rs 1,462 Cr (3,59,28,870 equity shares) |
| Fresh Issue | Rs 805 Cr (1,97,78,870 equity shares) |
| Offer for Sale | 1,61,50,000 equity shares (Rs 657 Cr) |
| Face Value | Rs 2 |
| Price Band | Rs 386 – 407 |
| Mkt/Bid Lot | 36 Nos. |
| Implied M-Cap | Rs 5,008 Cr |
| Implied Equity Cap | Rs 24.61 Cr |
| Free Float | 46.59% |
| Lead Manager | IIFL Securities, ICICI Securities and JM Financial |
| Registrar | Link Intime |
| Listing | BSE, NSE |
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INDICATIVE ISSUE SCHEDULE |
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| Opening :09-Nov-2022 | Closing :11-Nov-2022 |
| Allotment :16-Nov-2022 | Refunding :17-Nov-2022 |
| Demat Credit :18-Nov-2022 | Trading :21-Nov-2022 |
The Offer
The Chennai head-quartered Archean Chemical Industries Ltd (ACIL), whose manufacturing operations are in Gujarat, is entering the capital market with a Rs 1,462 Cr IPO which consists of a fresh issue of Rs 805 Cr (1,97,78,870 equity shares) and an offer for sale of 1,61,50,000 equity shares (Rs 657 Cr). The offer is being made through the book-building route with a price band of Rs 386-407 for Rs 2 paid-up share.
Applicants for the IPO should bid for a minimum lot of 36 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE and NSE on Monday, November 21, 2022. IIFL Securities, ICICI Securities and JM Financial are the lead-managers to the offer. Link Intime has been roped in as the registrar to the issue. The bidding opens on Wednesday, November 9, 2022 and closes on Friday, November 11, 2022.
The company proposes to utilize the net proceeds from the fresh issue (Rs 805 Cr) towards redemption of NCDs issued by the company to the tune of Rs 644 Cr. The balance amount is earmarked for general corporate purposes.
Lineage
ACIL is not new to the Indian capital market. Its non-convertible debenture (NCD) issue of Rs 840 Cr has already been listed on the wholesale debt segment of the BSE. The management is so poor in corporate governance that it has repeatedly failed to comply with the SEBI regulations, Stock Exchange’s listing guidelines and the provisions of the Companies Act!
In fiscals 2021 and 2022, the company failed to comply with the Listing Regulations in relation to submission of audited financial statements and half-yearly financial results, XBRL filing of financials, publishing financial results in newspaper, submission of certificate of debenture trustee taking note of specified content, submission of annual report to debenture trustee, annual undertaking to stock exchange regarding submission of all documents and intimations to debenture trustee. It ended up in paying penalties for its failures.
Further, in fiscal 2022, the company had filed a compounding application to Registrar of Companies for condonation of delay in conducting annual general meeting for financial year ended March 31, 2020 in a timely manner and finally settled the matter by paying a penalty.
As regards ACIL’s promoters, the company was incorporated in July 2009 by seven people though Brahmanandam Pendurthi and his spouse Pramila held 99.95% of the equity of Rs 10,00,500. However, the Red Herring Prospectus claims that Ravi Pendurthi and Ranjit Pendurthi (sons of Brahmanandam and Pramila Pendurthi) who subscribed to just 10 shares of Rs 10 each were the original promoters of the company! The genesis of ACIL actually dates back to November 2003 with the formation of a partnership firm under the name of Archean Chemical Industries at Chennai. The partnership firm was converted into private limited company in 2009.
For reasons best known only to the promoters, their holding underwent a change and a significant portion of their stake was shifted to a `corporate promoter’, Chemikas Speciality LLP. Chemikas was originally incorporated in June 2010 as a private limited company under the name of Goodearth Fertilisers Company Private Ltd which was converted into limited liability partnership (Goodearth Fertilsiers Company LLP) in April 2018. In January 2022, the name was changed to Chemikas Speciality LLP.
Chemikas is holding the largest chunk of 38% equity in ACIL. The offer document claims that Chemikas was authorised to engage in the business of manufacture, production, development of chemical fertilisers, bio-fertilizers, petro chemicals, refining industrial chemicals, and hydrocarbons, their inputs and technologies and allied products/ bye- products and conversion, storage and marketing. But, it does not reveal the financial standing of the corporate promoter.
Ranjit Pendurthi and Ravi Pendurthi are the partners of Chemikas, having 98% and 2% share, respectively. In fact, only in December 2021, the capital contribution and profit sharing of Ranjit Pendurthi and Ravi Pendurthi in Chemikas was amended from 50%:50% to 98%:2% without involving any consideration between the partners for such change in the constitution and profit-sharing ratio.
The individual promoters Ranjit and Ravi are directly holding 25.81% and 1.56% respectively in ACIL. Strategic investor Sojitz Corporation of Japan, who is one of the major customers of ACIL, has invested Rs 22.50 Cr in 2011 which amounts to 2.42% of the equity. In 2018 ACIL received investment from India Resurgence Fund (IRF), a joint venture between Piramal Enterprises Ltd and Bain Capital Credit by way of redeemable NCDs aggregating to Rs 840 Cr which are listed on the wholesale debt segment of the BSE.
Two of the companies with which the individual promoters had associated with have been closed down in 2021. Also, the public company has taken properties on rent from the promoters. Strangely, the registered office of the manufacturing company operating from Gujarat is kept in Tamil Nadu. All these reflect poorly on the credibility of the promoters.
Key Management
Individual promoter Ranjit Pendurthi is designated as the Managing Director of the company. He holds a degree of master in business administration and claims to have 21 years of experience in the chemical business.
Bhupathi K, a certified boiler operation engineer who holds a degree of bachelor of mechanical engineering, is the vice-president-operations of the company. He has been previously associated with Epsilon Carbon, Philips Carbon Black, E.I.D Parry India and Hi-Tech Carbon. He claims to have 28 years of experience in spearheading production, maintenance, erection and commissioning, quality and projects with key focus on profitability. However, he has been with ACIL only for a year. The Company Secretary and Chief Financial Officer too have joined the company only less than six months ago.
What’s more disturbing is, in just five months time, ACIL has had three company secretaries! And, in less than two years, it has had three CFOs. Frequent changes of top executives reflect poorly on the quality of the company.
Stakeholders
As on the date of the Red Herring Prospectus the promoter group’s three shareholders collectively hold 67,724,755 shares, which constitute 65.58% of the paid-up equity capital (10,32,74,120 shares). IRF controls 23.33%, Piramal Natural Resources Private Ltd (PNRPL) holds 8.67% and Sojitz Corporation has 2.42%.
On the post-IPO capital of 12,30,52,990 shares, Chemikas will hold 30.44% at a negative cost of 11.53 per share, Ranjit Pendurthi will have 21.66% at nominal cost of Rs 11.96 a share (as against the cap price of Rs 407), Ravi Pendurthi will hold 1.31% at a price of Rs 36.57, IRF will have 11.19% at an extremely negative cost of 284.09 per share and PNRPL will hold 4.16% at a negative cost of 283.98 per share. Hence, one can expect some selling pressure after the lock-in period of six months.
Business
ACIL presents itself as a leading specialty marine chemical manufacturer in India. It focuses on producing and exporting bromine, industrial salt and sulphate of potash. The company procures raw materials from its brine reserves in the Rann of Kutch, located on the coast of Gujarat, and manufactures its products near Hajipir in Gujarat.
The company commenced industrial salt operations in 2013 and commenced exports to Japan and South Korea. It commenced production of bromine and started exporting to China in 2014. It commissioned production of sulphate of potash in 2015 and commenced exports to Belgium. In 2021, it increased the bromine capacity to 28,500 MT and commenced exports to Qatar.
Product wise, bromine contributes more 50% and industrial salt 49% of the sales. Exports account for more than two-thirds of the sales. The company reportedly markets its products to 18 global customers in 13 countries and to 24 domestic customers. Its largest customer Sojitz Corporation contributes about 20% of the total sales.
Financial Track
ACIL was a loss-making company until fiscal 2020. In fact, as losses were mounting, the company could not fulfill its debt obligations in 2017 and it had to go for a debt-restructuring scheme. The overdue principal and interest were repaid by the company by November 2018. In Fiscal 2019, it recorded an exceptional item for the write-back of loans and interest of Rs 114 Cr which helped to reduce the accumulated loss. The company cleared the past deficits only in fiscal 2022.
Since 2020 not only the company’s sales are surging but, its operating margins too have increased considerably, from 13% in fiscal 2019 to 41% in fiscal 2022. The present fresh issue will help the company to significantly reduce the debt burden which stood at Rs 912 Cr at the end of June 2022. However, how long it will be able to sustain the fabulous operating margin of 41% remains to be seen.
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Archean Chem Consolidated Financials (in Cr) |
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| Period Ended |
Jun-22 |
Mar-22 | Mar-21 | Mar-20 |
Mar-19 |
| Months |
3 |
12 | 12 | 12 |
12 |
| Revenue |
400 |
1130 | 741 | 608 |
566 |
| Operating Profit |
161 |
467 | 262 | 164 |
73 |
| OPM% |
40 |
41 | 35 | 27 |
13 |
| Other Income |
9 |
12 | 14 | 9 |
7 |
| EBIDTA |
170 |
480 | 276 | 173 |
80 |
| EBIDTA % |
42 |
42 | 37 | 28 |
14 |
| Interest |
39 |
162 | 130 | 122 |
118 |
| Depreciation |
18 |
67 | 55 | 52 |
49 |
| Loan Write-back |
0 |
0 | 0 | 0 |
114 |
| Net Profit |
84 |
189 | 67 | -36 |
40 |
| Equity (Implied) |
25 |
19 | 19 | 19 |
19 |
| Reserves (Implied) |
1133 |
242 | 155 | 155 |
155 |
| Accumulated Loss |
0 |
0 | 102 | 169 |
132 |
| Borrowing |
912 |
845 | 858 | 857 |
754 |
| Fixed Assets |
1121 |
1102 | 1060 | 1074 |
945 |
Valuation
ACIL’s reported financials seem to justify its IPO valuation. However, the credibility of the promoters and the pathetic quality of corporate governance practiced by the management would advise caution.
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HOW ARCHEAN COMPARES WITH SELECT LISTED PEERS |
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Financials |
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| (Amount in Cr) |
Archean Chem |
Deepak Nitrite | Tata Chemicals |
Neogen Chem |
| Market Cap |
5008 |
31581 | 28642 |
3750 |
| Borrowing |
845 |
301 | 6803 |
198 |
| Fixed Assets |
1102 |
2086 | 15641 |
296 |
| Revenue |
1130 |
6802 | 12622 |
487 |
| Other Income |
12 |
43 | 256 |
1 |
| EBIDTA |
480 |
1646 | 2561 |
88 |
| Interest |
162 |
34 | 303 |
19 |
| Net Profit |
189 |
1067 | 1185 |
44 |
| Equity Cap |
25 |
27 | 255 |
25 |
| Reserves |
1133 |
3311 | 18903 |
414 |
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Stock Features |
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| Current Price (Rs) |
407 |
2315 | 1123 |
1504 |
| Face Value (Rs) |
2 |
2 | 10 |
10 |
| Book Value |
94 |
245 | 751 |
176 |
| Promoter Stake % |
53.4 |
45.7 | 38.0 |
60.2 |
| Debt/Equity |
0.7 |
0.1 | 0.4 |
0.5 |
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Profitability |
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| OPM % |
41.3 |
23.6 | 18.3 |
17.8 |
| Net Margin % |
16.5 |
15.6 | 9.2 |
9.1 |
| Cash EPS |
20.76 |
91.23 | 72.32 |
22.51 |
| Earnings Per Share |
15.33 |
78.20 | 40.71 |
17.82 |
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Return |
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| RONW % |
54.4 |
32.0 | 6.2 |
10.1 |
| ROCE % |
34.6 |
40.4 | 6.8 |
11.9 |
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Discounting |
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| Price/Earnings |
26.6 |
29.6 | 27.6 |
84.4 |
| Price/Cash EPS |
19.6 |
25.4 | 15.5 |
66.8 |
| Price/Book Value |
4.3 |
9.5 | 1.5 |
8.5 |
| Price/EBIDTA |
10.4 |
19.2 | 11.2 |
42.8 |
| Price/Revenue |
4.4 |
4.6 | 2.3 |
7.7 |
| Price/Fixed Assets |
4.6 |
15.1 | 1.8 |
12.7 |
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Distribution |
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| Dividend % |
0 |
350 | 125 |
27.5 |
| Yield % |
0 |
0.3 | 1.1 |
0.2 |
| Pay-out % |
0 |
9.0 | 26.9 |
15.4 |