Deepak Chemtex BSE SME IPO review (May apply)

• DCL is engaged in the business of manufacturing and marketing of colorants.
• The company has posted inconsistency in its top lines for the reported periods.
• The sudden boost in bottom lines from FY23 raises concern over the sustainability.
• Based on its FY24 super annualized earnings, the issue appears fully priced.
• Well-informed investors may park funds for the medium term.

ABOUT COMPANY:
Deepak Chemtex Ltd. (DCL) is primarily engaged in the business of manufacturing of colorants finding its application in Food, Drug, Cosmetics, Cleaning compounds, Agriculture and other industries. Colorants are formulations of chemical intermediates, pigments or dyes and additives used to add colour to various consumables.

It commenced business in 1997 and has over the years evolved into manufacturing of a complete range of FD&C (Food, Drug and Cosmetic) colours used in the confectionary, bakery, desserts, beverages, dairy products, seasonings, pet foods, pharmaceutical products, cosmetics & personal care products. The company also manufacture salt free dyes used in inkjet industry, pond dyes used in in ponds, lakes, swimming pools etc. and other colorants used in car wash products, portable sanitation cleaners, detergent & soap, fuel, oil & lubricants, smoke, seed treatment, crop protection, fertilizer indicators, floral dyes etc.

DCL uses various production processes like: Sulphonation, Condensation, Bromination, Oxidation, Reduction, High pressure reactions, Purification etc. which enables it to cater to niche and advanced requirements of a wider range of end-products and applications. The company manufactures colorants from unwanted salts and isomers. To ensure quality standards its manufacturing unit has also received HALAL certificate which guarantee that the food is prepared in accordance with Islamic law and is unadulterated and KOSHER certificate that a particular food item or product has been prepared in accordance with the Dietary Laws of Judaism.

DCL is exporting to countries like: China, France, Kenya, Mexico, Europe, Japan, Australia, United Kingdom, United States of America etc. It has successfully expanded commercialized product portfolio from around 50 products in Fiscal 2021 to around 100 products in Fiscal 2023. As of July 31, 2023, it had 88 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden book building route IPO of 2880000 shares of Rs. 10 each and has announced a price band of Rs. 76 – Rs. 80 per share. It mulls mobilizing Rs. 23.04 cr. at the upper cap. The issue opens for subscription on November 29, 2023, and will close on December 01, 2023. The minimum application to be made is for 1600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 26.51% of the post-IPO paid-up capital of the company.

From the net proceeds of the IPO funds, it will utilize Rs. 0.55 cr. for capex for new plant and machinery, Rs. 2.70 cr. for investment in subsidiary, Rs. 12.50 cr. for working capital, and the rest for general corporate purposes. After reserving 147200 shares for the market maker, the company has allocated net portion of the IPO as not more than 50% to QIBs, not less than 15% for HNIs and not less than 35% for Retail investors.

The issue is solely lead managed by Hem Securities Ltd. and Bigshare Services Pvt. Ltd. is the registrar of the issue. HEM group’s Hem Finlease Pvt. Ltd. is the market maker for the company.

Having issued initial equity shares at par, the company allotted further equity shares at a fixed price of Rs. 40.00 per share (on the basis of Rs. 10 FV) in March 2003. It has also issued bonus shares in the ratio of 15 for 1 in August 2023. The average cost of acquisition of shares by the promoters is Rs. NIL.

Post-IPO, DCL’s current paid-up equity capital of Rs. 7.98 cr. will stand enhanced to Rs. 10.86 cr. Based on the upper cap of IPO price band, the company is looking for a market cap of Rs. 86.91 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, DCL has (on a consolidated basis) posted a total revenue/net profit of Rs. 29.73 cr. / Rs. 2.63 cr. (FY21), Rs. 54.44 cr. / Rs. 4.23 cr. (FY22), and Rs. 47.84 cr. / Rs. 6.31 cr. (FY23). For H1 of FY24, it earned a net profit of Rs. 3.11 cr. on a total income of Rs. 22.13 cr.

For the last three fiscals, the company has reported an average EPS of Rs. 6.26 and an average RoNW of 43.61%. The issue is priced at a P/BV of 3.40 based on its NAV of Rs. 23.55 as of September 30, 2023, and at a P/BV of 2.08 based on its post-IPO NAV of Rs. 38.51 per share (at the upper cap).

If we attribute consolidated super FY24 annualized earnings to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 13.96.

For the reported periods, the company has posted PAT margins of 8.91% (FY21), 7.82% (FY22), 13.51% (FY23), 14.31% (H1-FY24), and RoCE margins of 55.09%,50.22%, 49.63% 20.64% respectively.

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It will adopt a prudent dividend policy based on its financial performance and future prospects.

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Vidhi Specialty, Vipul Organics, and Kiri Ind. As their listed peers. They are trading at a P/E of 65.15, 86.44, and NA (as of November 24, 2023). However, it is not comparable on an apple-to-apple basis.

MERCHANT BANKER’S TRACK RECORD:
This is the 33rd mandate from Hem Securities in the last three fiscals (including the ongoing one). Out of the last 10 listings, all listed at premiums ranging from 10.57% to 125% on the day of listing.

Conclusion / Investment Strategy
The company is operating in a highly competitive and fragmented segment of colorants. It posted inconsistency in its top lines for the reported periods, but its bottom line marked boosted trends from FY23 onwards, that raises concern over the sustainability. Based on FY24 super annualized earnings, the issue appears fully priced. Well informed investors may park funds for the medium term.

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