Buy Anupam Rasayan for short term gains

ANUPAM Rasayan Limited is tapping the capital markets with its fresh issue for Rs 760 crore in a price band of Rs 553 to 555. The issue would open on Friday the 12th March and close on Tuesday the 16th March.

The company is in the business of custom synthesis and manufacturing of speciality chemicals in India. The company has six manufacturing plants spread over Sachin in Surat and Jhagadia in Bharuch, both in Gujarat. The object of the issue is to raise money to repay the debt taken for capital expenditure. The company has ramped up production in all its units except unit V which was around 43 per cent utilisation for the nine-month period ended December 2020. The company has the necessary orders to utilise this capacity going forward.

The demand for speciality chemicals is ever growing and has multiple uses as far as various industries are concerned. Products manufactured by the company are used in life science chemicals and other speciality chemicals. The end use segments include agrochemicals, personal care and pharmaceuticals. In the speciality chemicals space, the users include speciality pigments, speciality dyes and polymer additives. The company has a large export base and more than two third of revenues come from exports. The company had reported revenues of Rs 539.38 crore for the year ended March 2020 which improved to Rs 563.16 crore for the nine months ended December 2020. When compared with the year ago period, this turnover was Rs 374.5 crore. In terms of profit for the period the same was Rs 52.97 crore for March 2020, Rs 48.09 crore for nine months December 20 and Rs 42.80 crore for the nine months December 2019.

The equity has changed in the current nine months from Rs 50 crore earlier to Rs 86.20 crore as at end of December 2020. Post the fund raising the equity would increase by almost 1.37 crore shares and become close to 100 crore. The EPS on a fully diluted and restated basis is Rs 6.94 for the year ended March 2020. This translates to a PE band of 79.68-79.97. Certainly, expensive when compared to the peers as listed in the offer document. Considering the fact that the company has already completed its capex and would be utilising the issue proceeds for repaying its debts, it could be presumed that there would be a saving of Rs 55-60 crore on interest repayment itself. While this would flow to the bottom-line, there are concerns about the business model of doing contract manufacturing. Anupam contracts the selling price for annual supply at the end of every calendar year. The company maintains an inventory of six months of raw material and three months of finished inventory and manages an open risk of the balance three months. This increases the cost of manufacturing on account of inventory and exposes the company to risk of raw material.

While the company would endeavour to reduce the order period from one year to six months, the same is work in progress. Valuations are steep when compared to its peers. Even if one were to consider the fact that capex has been completed and the object of the issue is repayment of debt, valuations remain expensive. Considering the fact that primary markets specific and secondary markets in general are currently under a state of frenzy, the issue getting subscribed is without a doubt. Grey markets which have become an integral part of the primary market, indicate a premium of around 50-60 per cent of the issue price, making it attractive for successful applicants. Investors should apply for the issue and on being successful, exit on listing day with whatever gains are available. Post the declaration of April-June 2021 results in August 2021, a fresh look should be taken at this company and then a decision taken whether to re-enter this share or not.

(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)