Laxmi Organic IPO: Laxmi Organic’s IPO opens on March 15, should you subscribe?

• Issue dates: March 15-17, 2021
• Price band: Rs 129-130 per share
• Issue size: Rs 600 crore
• Implied market capitalization: Rs 3400 crore
• Lot size: 115 shares

Laxmi Organic Industries, a speciality chemical company, plans to raise Rs 600 crore from an initial public offer (IPO). A half of the proceeds will be from fresh issuance of shares to expand capacity and repay debt. The balance amount is offer for sale by the promoters. Long-term investors may subscribe to the IPO given the recovering utilization rate and expected earnings boost from capacity expansion in a high-growth segment of the chemical sector.

Business

Raigad headquartered Laxmi Organic manufactures acetyl intermediaries and diketene derivatives that are used in the agrochemical, pharmaceutical, paint and coating, and packaging sectors. It is the largest manufacturer of ethyl acetate and diketene in India with a market share of 30 per cent and 50 per cent respectively. The company caters to customers such as Dr Reddy’s Laboratories, Hetero Lab, and Laurus Labs in the pharma sector,

and Syngenta in agrochemicals and Sudarshan Chemicals in pigments. The pharma and packaging customers contribute two-third to the revenue. The export forms nearly quarter of the revenue.

Financials

Revenue grew annually at 4.9 per cent to Rs 1,534 crore while net profit dropped by 3.6 per cent to Rs 70.2 crore between FY18 and FY20. Lower profit was due to the impact of floods on the plant utilisation and higher amortization. The utilization of the speciality chemical plant rose to 67 per cent in December 2020 compared with 41 per cent in April 2020. In the first half of FY21, the company posted revenue of Rs 813 crore with a profit of Rs 45.5 crore.

Growth prospects

The company’s capacity of speciality chemicals will increase to 82,525 metric tonnes per annum (MTPA) by November 2021 from the current 78,045 MTPA. It has entered the fluoro speciality chemicals business through the acquisition of assets of Italy’s Miteni. Commercial production from the new fluoro chemical plant is expected to start from March 2022, which was delayed due to Covid-19. In the next few years, it is expected that one in every three active pharmaceutical ingredients will be based on fluorine chemistry, which offers a promising scope for growth.

Risk

India is highly import dependent on acetic acid , one of the raw materials for ethyl acetate. Globally, its prices have been quite volatile of late. This may affect the operating margin as the raw material constitutes around 46-52 per cent of the total expenses.

Valuation

At Rs 130, the IPO demands a price-earnings (P/E) multiple of 37.6 based on the annualized revenue for the first six months of FY21, which is in line with industry average P/E of 35.6. Rossari Biotech, a speciality company, recently listed on bourses, commands a P/E of 67 based on the annualized earnings for FY21. Its revenue is nearly half of Laxmi Organic and has a lower return on equity (RoE) of 7.8 per cent compared with Laxmi Organic’s 16.5 per cent in FY20.