Chemplast Sanmar: Take a call on investing after June qtr results

Chemplast Sanmar Limited, which has tapped the capital markets with its fresh issue of Rs1,300 crore and an offer for sale of Rs 2,550 crore had earlier completed allocation to anchor investors. The price band of the issue is Rs530-541. The issue opened on Tuesday (August 10) and closes on Thursday (August 12).

The company allotted 3,20,24,029 equity shares at the top end of the price band of Rs 341 to 43 anchor investors comprising of 78 entities. The top 4 anchor investors were domestic mutual funds namely: - Axis Mutual Fund, SBI Mutual Fund, Mirae Asset and HDFC Life Insurance who were each allotted 32,34,735 equity shares or 10.10% of the anchor book.

The overall book was more or less split between FPI's and Domestic Investors with the former allotted 48.34 per cent of the anchor book and Domestic Investors getting 51.66 per cent. The top four anchor investors comprising 21 entities were allotted 40.40 per cent of the anchor book.

The company is into the business of speciality chemicals and manufactures speciality paste PVC resin and S-PVC. It is also a custom manufacturer. To manufacture some of the above products it also has manufacturing plants to make Hydrogen Peroxide, Caustic Soda and chloromethanes. The user industry is diverse and chemicals manufactured are used in footwear, leather, auto upholstery, pharmaceuticals, paper, agrochemicals, textiles and other industries. Fairfax promoted by Prem Watsa has been an investor in the parent/holding company since 2016. The plants of the company are strategically located on the ports giving an advantage in terms of location and shipping of raw materials and finished products to customers. The company has different competitors in the various products manufactured by them. It is therefore difficult to give a like to like comparison for their business. For example, in the business of PVC, a sizeable competitor is Finolex.

The company is spending over Rs 600 cr for expanding its facilities in the next couple of years. The present capacity of 66 KTPA of speciality paste PVC Resin would be increased to 101 KTPA at a cost of Rs 256 cr. Further a new custom manufacturing multipurpose block is being set up at a cost of Rs 340 cr.

The company reported revenues of Rs 3,851 cr for the year ended March 2021 and had an EBITDA of Rs 978 cr. The PAT reported was Rs 410 cr and the PAT margin was 10.8 per cent.

The company was a listed entity and had delisted its shares in 2012-13 at a price of Rs 75 for a Rs 5 paid up share. (Face value was Rs 1 and delisting price was Rs 15). Hence, adjusted is Rs 75. This investor-friendly company then changed its face value to Rs5 per share from Re 1 and forced out investors to exit the company and increased its holding to a little over 98 per cent. There is a very famous saying in English which says "As you sow, so you reap".

This company in its reorganisation of business and in its effort of getting its act together, roped in Fairfax in 2016. A couple of years later it realised that the management control on account of issue of fully convertible debentures would slip into the hands of the investor. Then began the exercise of ensuring that the company remained in the hands of the promoter. The terms of conversion were revised in two stages and the idea of relisting the company was born. Fast forward to 2021, the objects of the issue are to repay debt of the company. The offer for sale would be used to retire the debt the company has taken from the investor. The debt in the form of NCD's has a coupon rate of 17.5 per cent. Sounds very high! This is actually a combination of conversion from convertible debentures to NCDs.

The issue price of Rs 530-541 is based on an EPS of Rs 30.60 for the year ended March 2021. Based on this number the PE ratio is in a band of 17.32-17.68 times. The NAV of the company is a negative 139.15 per share. This is primarily on account of converting the subsidiary CCVL into a wholly-owned subsidiary. It's interesting to note that the selling promoter's average cost of shares is a mere Rs1.72 per share. Post the issue, the public shareholding would be broadly 45 per cent, while the promoter holding would be 55 per cent.

To sum up, the promoter's approach to minority shareholders has not been the best and is certainly not investor friendly as mentioned by the management. If they had allowed shareholders to remain and not delisted, the need to bring in Fairfax on terms and conditions which were not best suited for the company may not have happened. Secondly, trying to take advantage of favourable market conditions as far as primary markets and the buzz of speciality chemicals seem to be opportunistic on the part of the promoters of the company. Finally, the poor health of the holding company and currently making losses, adds to the discomfort of me as a prospective investor.

Even though there may be some listing pop available, I would be quite happy to allow the company to list, declare June quarter results by the end of August and take a call on investing post that when have better clarity of the financial health of the promoters, their holding company and the state of share pledge by the promoters.