Chemcel Biotech Limited is all set to launch their initial public offering, with the issue opening on September 9, 2008. While the company is quite unheard of in a majority of the country, this Vijayawada-based company has been making steady strides in Andhra Pradesh, where they have established a good base for themselves. Looking to raise Rs 24.64 crore, by offering 15.4 lakh equity shares at the rate of Rs 16 per share, the company that essentially deals in pesticides is now diversifying into the area of bio-fuels, which in all likelihood will be the way of the future.
Chemcel is raising money mainly to set up a bio-diesel manufacturing unit at Kondapalli near Vijayawada, Andhra Pradesh. Meeting with the additional working capital required by their agrochemical and bio fertiliser division on account of increased operations, repaying the short-term loan taken from the Union Bank of India to start off the bio diesel plant and meeting working capital requirements will also be taken care of by the current issue proceeds. The bio-diesel manufacturing unit is going to cost Rs 10.95 crore, out of which over Rs 1 crore has already been invested in the same. The additional working capital requirement amounts to Rs 9.45 crore and the short-term loan to be paid back amounts to a total of Rs 3.86 crore.
Business and industry overview
Bio-diesel is a biodegradable, clean-burning diesel fuel made of natural, renewable sources such as vegetable oils, used vegetable oils (yellow grease) and animal fats. It can act as a diesel substitute, with very little or no engine modifications for up to a 20% blend and only minor modifications for a blend greater then 20%. The major commodity that Chemcel will be using to produce this bio-diesel will be Jatropha Curcas (Ratanjyot), which is easily grown in any soil and weather conditions. A subsidiary of Chemcel, M/s Jetro Petro Biotech Private Limited for procurement of raw material including jatropha seeds, pongamia, neem, palm oil seeds, cotton seeds has already tied up with farmers in various parts of Andhra Pradesh. With Europe, the Indian government, railways, and other private diesel producing companies vying for bio-diesel, the demand is more than taken care of. Especially with increasing crude oil prices, environmental concerns and rising awareness, the global outlook towards bio fuels is very positive at the moment and will only strengthen in the conceivable future.
With crude oil accounting for 28% of our total imports last year, the government is actively promoting the manufacturing and production of bio fuels and Chemcel should greatly benefit from the tax deductions it receives from this diversification. The company?s primary business is in the agrochemical industry, since they manufacture pesticides, mainly those used for rice cultivation.
Chemcel was incorporated on September 29, 1995 and their main products are in three forms: liquids, granules and dusts. They have CIB registrations for 34 products to manufacture pesticides for crops like paddy, cotton, sugarcane, turmeric, chillies, pulses, vegetation, etc and are currently manufacturing 17 of these products. Chemcel hexa, cosy, counter and celphate are the highest selling products they currently have, with distribution strength of over 18 distributors, 350 direct dealers and 550 retailers.
Promoters and concerns
The promoters and promoter group of the company currently hold 57.23% of the company shares, and will continue to hold a 29.4% stake in the company post-issue. The chairman and managing director, as well as other key personnel have a great deal of experience within the agrochemical industry and have been following the agricultural markets in India for a long time. Since the essentially planned on launching their IPO in 2006, the company has closely understood the bio fuels world for sometime now. However, the current management team has no experience in running a bio-diesel manufacturing unit so far. ?We do however plan to hire experienced personnel within this field,? says Vijaya Kumar, Md, Chemcel. The company?s major weakness however is that while the company has shown moderate growth over the past few years, it is still a small company with rather big expansion and future plans, in an industry, which requires a high working capital. Also, the company has shown negative cash flows for the past few years on account of the same, though with the diversification into bio fuels, this should change. Another point for future investors to note is that the manufacturing of bio-diesel will only commence post-September 2009, after which the company financials should really pick up. However, the fundamentals of Chemcel are strong, with an even growth story essayed so far.
Number talk
The company showed sales of Rs 24.57 crore in the last financial year, which is almost a 191% increase from their sales in 2003. While the manufacturing expenses of the firm have been steadily rising due to increasing costs and production over recent years, their selling expenses has gradually fallen.
This has been due to their increased distribution and sales network created and is a positive for the company. While the company does have many outstanding tax dues to the government, this situation has occurred due to the liquidity crunch they faced, and since there is no penalty faced for the same, the company hopes to pay up the tax owed by them soon. The profits for financial year 07-08 were Rs 1.22 crore, a tremendous jump from the Rs 8.41 lakh they earned 4 years ago.
While the growth has been steady, this clearly outlines the fact that the company is banking heavily on the success of this bio diesel plant to boost revenues. Taking into consideration last year?s profits, the EPS of the company post-issue would amount to Rs 0.47, with a PE of 33.78. The agrochemical industry has an average PE of 25.80 and pre-issue the company?s PE was better than this.