Paragon Fine NSE SME IPO review (May apply)

Paragon Fine NSE SME IPO review (May apply)

• The company is engaged in the business of speciality chemical compounds.
• It posted static performance for FY21 and FY22.
• The sudden boost marked in its bottom line on a static top line for FY23 raise eyebrows.
• Based on super annualized earnings of FY24, the issue appears fully priced.
• Well-informed investors may park moderate funds for medium to long-term rewards.

ABOUT COMPANY:

Paragon Fine and Speciality Chemical Ltd. (PFSCL) is engaged in the business of custom synthesis and manufacturing of speciality chemical intermediates involving complex and differentiated chemistry. It commenced business as a partnership firm in the year 2004 and has, over the years, evolved into custom synthesis and manufacturing of Pharma Intermediates, AGRO intermediates, Cosmetics Intermediates, Pigment Intermediates and Dye Intermediates, etc. for a diverse base of Indian and global customers.

The company works with an approach towards chemistry combined with technology and systems that would lead to sustained product development. Its diverse range of products finds applications across various industries, including pharma, agrochemicals, cosmetics, pigments and dyes. It uses various chemistry compositions like: Acetylation, Amination, Catalytic hydrogenation, Chlorosulfonation, Methoxylation, Nitration, Amidation, Ethoxylation, Sulphonation, etc. which enables it to cater to niche and advanced intermediate requirements of a wider range of end-products and applications.

Its product portfolio increased from around 100 products in Fiscal 2021 to around 140 products in Fiscal 2023. As of March 31, 2023, it had a team of 14 technocrats. It is a One Star Export House exporting in countries like: USA, Israel, Spain, United Kingdom, China, Switzerland, Taiwan, Thailand, Mexico, Japan, Russia, France, Indonesia, Latvia, Germany etc. As of June 30, 2023, it had 61 employees (including 5 contractual workers) on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:

The company is coming out with a maiden book building route IPO of 5166000 equity shares of Rs. 10 each. It has announced a price band of Rs.95 – Rs. 100 and mulls mobilizing Rs. 51.66 cr. at the upper cap. The issue opens for subscription on October 26, 2023, and will close on October 30, 2023. The minimum application to be made is for 1200 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 26.40% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO process, the company will utilize Rs. 1.00 cr. for civil construction in the existing factory premises, Rs. 12.90 cr. for repayment of certain borrowings, Rs. 7.87 cr. for capex for installation of additional plant and machinery, Rs. 13.00 cr. for working capital and the balance for general corporate purposes.

After earmarking 261600 shares for the market maker, the company has allocated not more than 50% for QIBs, not less than 15% for HNIs and not less than 35% for Retail investors.

Hem Securities Ltd. is the sole lead manager 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 also issued bonus shares in the ratio of 35 for 1 in July 2022 and 3 for 1 in July 2023. The average cost of acquisition of shares by the promoters is Rs. 0.00, Rs.0.13, and Rs. 051 per share.

Post-IPO, company’s current paid-up capital of Rs. 14.40 cr. will stand enhanced to Rs. 19.57 cr. Based on the upper cap of the price band, the company is looking for a market cap of Rs. 195.66 cr.

FINANCIAL PERFORMANCE:

On the financial performance front, for the last three fiscals, PFSCL has posted total income/net profit of Rs. 84.37 cr. / Rs. 4.40 cr. (FY21), Rs. 84.58 cr. / Rs. 4.49 cr. (FY22), and Rs. 105.01 cr. / Rs. 9.89 cr. (FY23). For Q1 of FY24 ended on June 30, 2023, it earned a net profit of Rs. 3.62 cr. on a total income of Rs. 29.00 cr. The sudden boost in its bottom lines for FY23 and Q1-FY24 not only raise eyebrows, but also concern over the sustainability of such margins going forward. Its other income is on the rise as seen from FY21 to FY23.

For the last three fiscals, the company has reported an average EPS of Rs. 4.98, and an average RoNW of 43.39%. The issue is priced at a P/BV of 5.55 based on its NAV of Rs. 18.03 as of June 30, 2023, and at a P/BV of 2.64 based on its post-IPO NAV of Rs. 37.82 per share at the upper cap.

If we attribute annualized super earnings of FY24 on post-IPO fully diluted paid-up equity capital of the company, then the asking price is at a P/E of 13.51. Based on FY23 earnings, the P/E stands at 19.76. The issue appears fully priced discounting all near term positives.

For the reported period of 39 months, the company has posted a PAT Margins of 5.28% (FY21), 5.42% (FY22), 9.67% (FY23), and 12.58% (Q1-FY24), and RoCE margins of 33.44%, 24.90%, 38.86%, and 12.25% for the corresponding periods. The sudden boost in bottom lines remains major concern going forward.

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 Aether Ind., Anupam Rasayan, Bodal Chem, and Deepak Nitrite as their listed peers. They are trading at a P/E of 90.90, 54.92, 62.42, and 60.14 (as of October 23, 2023). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER’S TRACK RECORD:

This is the 32nd mandate from Hem Securities in the last three fiscals (including the ongoing one). Out of the last 10 listings, all listed with premiums ranging from 10.57% to 90% on the day of listing.

Conclusion / Investment Strategy

PFSCL is engaged in the business of speciality chemical compounds. After static performance for FY21 and FY22, it posted bumper bottom lines on static top line. The sudden boost in its bottom lines for the past 15 months raises eyebrows as well as concern over the sustainability going forward. Based on annualized super earnings of FY24, the issue appears fully priced, discounting all near term positives. Well-informed investors may park moderate funds for medium to long term rewards.
Review By Dilip Davda on October 24, 2023

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