Chemplast Sanmar has a negative net worth. Should you apply for its IPO?

Chemplast Sanmar, which is coming with its IPO nearly a decade after delisting from bourses, is offering its shares at 21 times its adjusted FY21 EPS of Rs 26. Analysts say one should be cautious on the issue and not rush to subscribe to it.

“We assign ‘subscribe with caution’ rating to this IPO as the company is well positioned to capture favourable industry dynamics. However, negative net asset value along with higher trade payable days keep us cautious from a longer-term perspective,” said Saurabh Joshi of Marwadi Shares and Brokers.

Chemplast is one of the leading specialty chemical manufacturers in India. The IPO, priced at Rs 530-541, opened for bidding on Tuesday and will close on August 12. The company is aiming to raise about Rs 3,850 crore through the issue.

Here are key things you should know about the issue.

The IPO comprises fresh issuance of shares, aggregating up to Rs 1,300 crore, and an offer for sale of up to Rs 2,550 crore by promoters and existing shareholders. Promoters Sanmar Holdings (SHL) and Sanmar Engineering Services (

) will offload equity shares worth Rs 2,463.44 crore and Rs 86.56 crore, respectively, in the offer for sale.

Jyoti Roy of Angel Broking said while India’s specialty chemical industry is going to be one of the biggest beneficiaries of shifting of supply chains post the Covid-19 pandemic “we have concerns over Chemplast’s high debt and negative net worth.”

Roy has a ‘neutral’ rating on the IPO.

Analysts say the company’s lenders have imposed certain restrictive conditions on it under their financing arrangements, which may limit the company’s ability to pursue the business, plan for, or react to changes in their business or industry, posing a risk. Besides, 100 per cent of the share capital of CCVL, a key subsidiary, is pledged in favour of

Corporation.

Some analysts are, however, unfazed by these risks. Vikas Jain of Reliance Securities sees value in the company at current PE. “In our view, sustainability of financial performance and strong cash flow would be key catalysts for valuation rerating, going forward,” he said.

Chemplast said net proceeds from fresh issue will be utilised for early redemption of non-convertible debentures worth Rs 1,238.25 crore and for general corporate purposes, whereas proceeds from offer for sale will go to the existing shareholders.

The company said it would focus on institutional buyers during the book building process. Hence 75 per cent portion of the net issue is reserved for qualified institutional buyers (QIBs), whereas 15 per cent will be allotted to non-institutional investors (NIIs). Retail investors will have only a 10 per cent quota.

The company makes PVC resin, materials and intermediates for pharmaceutical, agro-chemical and fine chemicals sectors. It has four manufacturing facilities, of which three are located at Mettur, Berigai and Cuddalore in Tamil Nadu, and one is at Karaikal in Puducherry.