ROSSARI BIOTECH IPO : Quick analysis

Company is using the IPO proceeds for payment of earlier debt (~45%), Expansion (~35%) and other corporate purposes(~20%)

Strength

Company operates in three different segments and different countries thereby offering diversified products portfolio

Company providing customized solutions to specific industrial and production requirements of our customers primarily in the FMCG, apparel, poultry and animal feed industries through our diversified product portfolio comprising home, personal care & performance chemicals; textile specialty chemicals; and animal health and nutrition products. We operate in India as well as in 17 foreign countries including Vietnam, Bangladesh and Mauritius.

Largest manufacture of textile chemicals and leading manufacturer of acrylic chemicals

Company enjoy relationships in excess of five years with 12 out of their top 15 customers. Maintaining strong relationships with their key customers is, therefore, essential to their business strategy and to the growth of their business

Experienced Promoters with strong management team having domain knowledge

Good financial performance in past few years

Opportunities

The specialty chemicals industry is driven by both domestic consumption and exports. Home and personal care chemicals, water chemicals, construction chemicals, etc. are areas where specialty chemicals find applications. Exports are on the rise as India is becoming a central manufacturing hub for such chemicals. Tightening of environmental norms (eg. REACH regulations) in developed countries and the slowdown of China are contributing to the growth of exports.

Company is expanding its capacity by 20% to cater to growth in coming years.

Company is currently setting up another manufacturing facility at Dahej in Gujarat with a proposed installed capacity of 132,500MTPA which will enjoy proximity to the deep-water, multi-cargo port of Dahej. The proposed state-of-the-art facility will be well-equipped with advanced technologies and will be commissioned in Fiscal 2021

In order to remain competitive, Company must develop, test and manufacture new products and company has set-up a dedicated R&D centre at our Silvassa Manufacturing Facility and another one in Mumbai.

Growing consumption of environmentally friendly products: Rise of environmentally friendly specialty chemicals in India.

Growth in Household and I&I Cleaners market:The global household cleaners market is anticipated to reach USD 40.38 billion by 2025, growing at a CAGR of 4.4% from 2018 to 2023. The industrial and institutional cleaners market is expected to grow at a CAGR of ~6% during the forecast period. The growth of cleaners market will have direct implication on growth of home care chemicals market indicating a similar growth trajectory for the market

High population and growing need for hygiene:India is a thriving economy holding tremendous opportunities for cleaning chemicals companies. The country is second most populated country in the world. It is growing fast and the pace of urbanization is simply an unbelievable one. With these trends the country isalso facing a number of challenges. The incidence of infections is also increasing, paving way for the rise of homecare ingredients industry. The rapid urbanization is coupled with fast commercialization and millions of business establishments look for homecare products to meet their cleaning and hygiene requirements

Growing per Capita Consumption of Meat Products with High Demand for Animal Protein will drive the demand for Feed Additives, Especially Amino Acids

Strong Growth in the Livestock Feed Industry in developing regions with emerging demand forAquaculture feed will fuel the demand for Feed Ingredients

Rising Demand for Premium Pet Food will drive the Demand for Highly Specialized Ingredients

Some graphs from DHRP shows the potential and opportunity size for company

Global specialty chemical market
Global specialty chemical market
Indian specialty chemical market
Indian specialty chemical market

Risks

There is already a kind of downturn in the textile industry. Company significant sales comes from this sales channel. Company might be unable to increase or effectively manage the sales in short term in this category

There could be loss of any major institutional customers in our TSC and HPPC product categories or a reduction in their demand for our products due to COVID or unforseen circumstances. Significant portion of revenue also comes from this TSC and HPPC category. Revenue from top 5 customers itself is close to 35%

Company does not have any long term agreement with most of their customers and any impact in demand from customers will have a direct impact on revenues

Company has high dependence on sole manufacturing unit at Silvassa and Any disturbance, slowdown or shutdown of the Silvassa Manufacturing Facility can have a direct impact on revenue

Failure to develop new molecules in timely manner or failure to identify changing trends can seriously restrict the company growth

Company has high capital working requirement

Increase in the cost of raw materials as a percentage of revenue. Company largest expense is cost of raw materials. Primary raw materials are acrylic acid, surfactants and silicone oil. Cost of materials consumed represented 62.43%, 68.81%, 65.73% and 65.86%of company revenue from operations for the six months ended September 30, 2019 and in Fiscals 2019, 2018 and 2017, respectively. Company do not have long term agreements with any of their raw material suppliers and company acquire such raw materials pursuant to purchase orders from suppliers as a result of which, Company needs to forecast supply and demand and cause supply-demand mismatch

Further, the price of product is generally fixed at the time the purchase order is issued to company by customer and therefore company may not be able to pass on an increase in raw material to its customers. It shows that company does not have the pricing power

Technical risk -Failure to comply with the quality standards and technical specifications prescribed by institutional customers

Important point to note

Split/ Consolidation of equity shares in the last one year means IPO shares are with FV of 2Rs. So one should think that company is asking 5*425 Rs =2125Rs for IPO shares of FV 10 Rs

Company has also issues shares to other institutional investors @ same price which is normally uncommon but good part is it places retails investor on par with earlier institutional investors

Peers in different segments and Comparison

Peers in specialty chemicals

Specialty chemical industry is going to be more competitive leading to further consolidation of market

Peers in Personal care ingredients
Peers in textile chemicals
Peers in animal health and nutrition products

Financial snap

Company Balance sheet looks good and Debt is in control.

Final conclusion

Company presents a nice opportunity in growing field of chemicals and world moving away from China can really open the door for many companies growth. Rossari Biotech seems to be in the right place. With lot of competition in industry, growth may come in phases. Opportunity size available to grow

For investors IPO seems almost fully priced at the moment (FV 2 Rs and PE 31) if they are looking for short term gains. Depending upon market conditions on listing day, investors may get -10% to 20% gains.

Long term Investors can subscribe for 2-3 lots and hold. Look for Quarterly progress and add more or move to better opportunities available that time.

Please consult your financial advisor before applying in the IPO. Stock investments are risky in nature and may lead to capital loss

Enjoy investing!!

References

Most of the details gave been taken from Company DRHP.

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