Archean Chemical IPO: Should You Subscribe? What Does Brokerage Say?

On Wednesday, November 9, subscriptions for Archean Chemical Industries' Rs. 1428.4 - Rs 1,462.3 crore initial public offering (IPO) will open and close on November 11. The company will offer its shares for sale between Rs. 386-407 per share.

Archean Chemical Industries Ltd. (ACIL) is a leading specialty marine chemical manufacturer in India and focused on producing and exporting bromine, industrial salt, and sulphate of potash to customers around the world. According to Frost & Sullivan, ACIL is the largest exporter of bromine and industrial salt by volume in India in Fiscal 2021 and has amongst the lowest cost of production globally in both bromine and industrial salt. (Source: Company Commissioned F&S Report)

Leading brokerage firm Ashika Research on November 7, released a report on Archean Chemical Industries IPO whether to subscribe to IPO or not? The brokerage in the report has also highlighted the other details about the IPO with the recommendation, and revenue. Here are the key takeaways from the report:

IPO Details

The Company will not receive any proceeds of the Offer for Sale by the Selling Shareholder. (up to 2,000,000 equity shares by Chemikas Speciality LLP, up to 3,835,562 equity shares by India Resurgence Fund, Scheme I, up to 6,478,876 equity shares by India Resurgence Fund, Scheme II and up to 3,835,562 equity shares by Piramal Natural Resources Private Limited).

It is a fresh issue. Redemption or earlier redemption, in part or full, of NCDs issued by the Company (Rs. 644 cr.); and General corporate purposes.

• Issue Opens - November 09, 2022, to November 11, 2022
• Price Band - Rs. 386 to Rs. 407
• Bid Lot - 36 Equity Shares and in multiples thereof.
• The Offer - Public issue of 35,928,870 Equity shares of Face value Rs. 2 each, (Comprising of fresh issue of 19,778,870 Equity Shares* (Rs. 805 cr.) and Offer for Sale of 16,150,000 Equity Shares (Rs. 657.3 cr.*) by Selling Shareholder).
• Issue Suze - Rs. 1428.4 - 1462.3 Crore
• Face Value - Rs. 2

Ashika Research's views on ACIL

Archean attributes the strong market position to factors such as long-standing relationship with global customers, established infrastructure and access to brine reserves at the Rann of Kutch, manufacturing facility, and consistent delivery of high-quality products. The leadership position and low cost-production offers company the competitive advantages such as product pricing, economies of scale, and the ability to scale business, increase customer loyalty and expand client base.

Archean commands a leadership position in Indian bromine merchant sales (traded bromine in the market) by volume in FY21, and the company is the largest exporter of Bromine from India mainly to China. The balance of the bromine production is sold in the domestic market. According to Frost & Sullivan, the bromine global market size was US$3.13 billion in CY21, and the market is expected to grow at a CAGR of 5.8% between CY20 and CY25. In addition, the growing demand for bromine and bromine performance derivatives driven by a host of factors including an increasing demand for flame retardants, increasing consumption of oil well chemicals and increasing use of hydrogen and zinc bromide in flow batteries. In response to this demand, Archean intends to, and is in the process of, increasing their manufacturing capacity for bromine production.

Archean exported 100% of their industrial salt production, primarily to customers in Japan and China. According to Frost & Sullivan, global demand for industrial salt was 173 million MT in each of CY17, 171 million in CY18, and 173 million in CY19 and declined to 153 million MT in CY20 but is expected to grow at a CAGR of 2.8% between CY20 and CY25. The growing demand for industrial salt will be driven primarily by increasing industrialization owing to its wide range of industrial applications. In particular, demand is expected to increase from the food and beverage industry, the chlor-alkali sector in the chemical industry as well as chemical processing, water treatment, agriculture, and de-icing.

Archean is the only manufacturer of sulphate of potash from natural sea brine in India. According to Frost & Sullivan, global demand for sulphate of potash was 6.9 million MT in CY21 but is expected to grow at a CAGR of 6% between CY20 and CY25. The sulphate of potash market is being driven by the advantages of sulphate of potash over muriate of potash and growing demand from a growing middle-class population driving the use of fertilizers primarily for growing fruit and vegetables. ACIL aim to be the key producer and supplier of sulphate of potash in India.

Archean plans to expand the product line into bromine derivative performance products in the next 2 to 3 years, in particular brominated flame retardants, clear brine fluids and bromine catalysts used for the synthesis of PTA.

ACIL is setting up a new facility to manufacture bromine performance derivatives products through subsidiary, Acume Chemicals Pvt Ltd. The total estimated cost for setting up the bromine performance derivatives products is approximately Rs. 251.70 crore, which the company intend to fund through internal accruals.

Archean intends to, and is in the process of, increasing the manufacturing capacity for bromine production. To achieve the expansion of the bromine capacity, the company added in FY21 a feed enrichment section at the site in Hajipir, Gujarat which will improve bromine recovery from the sea bittern. This expansion added 18,000 MTPA to the bromine capacity. The company is looking to add an additional 12,500 MTPA capacity by FY23 at an estimated cost of approximately Rs. 17.88 crore which intend to fund through internal accruals.

In addition, to cater to the growing demand from the existing customers and to meet requirements of new customers, the company intend to expand the manufacturing capacities for industrial salt production by adding an additional washery of 250 tons per hour. The company expect that additional washery will be operational in FY23.

Revenue and recommendation

On financial front, during FY20-22, ACIL's Revenue and EBITDA grew at a CAGR of 36.3% and 77.7%, respectively. Average EBITDA margins is ~34%,. The RoE/RoCE were 29.4%/42.3%. For Q1FY23, revenue stood at Rs. 400 cr and EBITDA margin was 40.2%.

In terms of the valuations, on the higher price band, ACIL demands a P/E multiple of 14.8x based on Q1FY23 post issue fully diluted EPS and EV/EBITDA multiple of 8.1x based on Q1FY22 post issue fully diluted EBITDA. The industry P/E and EV/EBITDA is ~25x and ~15x which indicates that the IPO is suitably priced.

China plus one policy, largest manufacturer of certain specialty chemicals, expanding manufacturing facility, expanding R&D infrastructure, strong financials and healthy balance sheet will augur for the company's performance going forward. Hence, it is recommended to "SUBSCRIBE" the issue.

Disclaimer

The IPO report has been picked from the brokerage report of Ashika Research. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.