Rossari Biotech – Should you subscribe to this specialty chemical and technical textile supplier’s IPO?

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Company Introduction – They are one of the leading specialty chemicals manufacturing companies in India based on sales for Fiscal 2019 (Source: F&S Report), providing customized solutions to specific industrial and production requirements of customers primarily in the FMCG, apparel, poultry and animal feed industries through diversified product portfolio comprising home, personal care and performance chemicals; textile specialty chemicals; and animal health and nutrition products. They operate in India as well as in 17 foreign countries including Vietnam, Bangladesh and Mauritius. According to the F&S Report, as on September 30, 2019, they are the largest manufacturer of textile specialty chemicals in India providing textile specialty chemicals in a sustainable, ecofriendly yet competitive manner.

Some of its clients include IFB, Raymond, Bosch, HUL, Arvind Ltd and Panasonic.

Their pan-India distribution network has over 204 distributors as on May 31, 2020. They primarily sell home, personal care and performance chemicals; and textile specialty chemicals in a business-to-business model through distributors to customers in FMCG and apparel industries, respectively; and sell animal health and nutrition products to retailers through distributors.

They are in the process of establishing new manufacturing unit at the Dahej, Gujarat. They estimate that its Dahej Manufacturing Facility will achieve commercial operation by Fiscal 2021.It will have a proposed installed capacity of 132,500 MTPA which will enjoy proximity to the deep-water, multi-cargo port of Dahej.

Raw Materials – The primary raw materials for our specialty chemicals include acrylic acid, surfactants and silicone oil. All these raw materials are procured from the spot market.

Product Range

Their range is organized in three main product categories – (i) home, personal care and performance chemicals;
(ii) textile specialty chemicals; and (iii) animal health and nutrition products. As on May 31, 2020, they had a range
of 2,030 different products sold across the three product categories.

Home, personal care and performance chemicals

They are the leading manufacturer of acrylic polymers in India (Source: F&S Report) and currently manufacture
over 300 products for their customers in the soaps and detergent, paints, inks and coatings, ceramics and tiles,
water treatment chemicals and pulp and paper industries. It also manufactures institutional cleaning chemical
formulations for hospitality, facility management, airports, corporates, food service, commercial laundry, malls,
multiplexes, educational sector, places of worship etc. They are in advanced stages of expanding home,
personal care and performance product portfolio to water treatment formulations, specialty formulation for
breweries as well as dairies. They are also planning to introduce certain new products in the personal care and
cosmetics segments. While they primarily operate in a business-to-business model for home, personal care
and performance products, they also sell certain of end formulations to direct consumers under private label
or in partnership with digital market platforms such as Amazon. Its revenue from sale of home, personal care
and performance products constituted 46.81% of total revenue in Fiscal 2020.

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Textile specialty chemicals

They provide specialty chemicals for the entire value-chain of the textile industry starting from fiber, yarn to
fabric, wet processing and garment processing and as on May 31, 2020, manufactures and sales approximately
1,543 products for customers in this product category. They have differentiated product portfolio by
focusing on providing diversified and value added speciality chemicals to enhance hydrophilic properties, antimicrobial properties, flame retardant properties, fragrance, water repellents and UV absorbing properties of the
textiles. Revenue from sale of textile chemicals constituted 43.71% of total revenue in Fiscal 2020. Textile
industry consumes a large amount of water and significantly contributes towards water pollution, air pollution
as well as solid-waste pollution (Source: F&S). Accordingly, they focus on providing eco-friendly sustainable
chemical solutions to customers which either replaces the highly polluting chemicals being used by
customers or reduces the impact of environmental pollution by suitably modifying the overall industrial process.

Animal health and nutrition

They have also diversified into animal health and nutrition and currently supply poultry feed supplements and additives, pet grooming and pet treats including for weaning, infants and adult pets and currently manufacture over 100 products for customers in this category. They forayed into pet grooming sub-category pursuant to their acquisition of the ‘Lozalo’ brand and related trademarks, intellectual property and employees in Fiscal 2019.

Rossari manufactures majority of products in-house from manufacturing facility at Silvassa in the Union Territory of Dadra & Nagar Haveli. The Silvassa Manufacturing Facility, located on 8.6 acres of land, has an installed capacity of 120,000 MTPA. The annual capacity utilization of Silvassa Manufacturing Facility has moved from 74.19% in Fiscal 2018 to 93.94% in Fiscal 2019 and to 82.46% in Fiscal 2020. It is currently setting up another manufacturing facility at Dahej in Gujarat with a proposed installed capacity of 132,500 MTPA which will enjoy proximity to the deep-water, multi-cargo port of Dahej. The proposed state-of-the-art facility will be well-equipped with advanced
technologies and will be commissioned in March 2021.

Dates – July 13 to July 15

Promoter – Mr. Edward Menezes and Mr. Sunil Chari are the promoters of the company.

Issue Details

Issue Size – Rs 496 Cr (Fresh 446 Cr + OFS 50 Cr)

Price – Rs 423 – 425

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Min lot – 35 Shares

Face Value – Rs 2

As mentioned in the red herring prospectus (RHP), the company raised ₹99.99 crore in a private placement of 22.5 lakh equity shares to various investors including Malabar India Fund Limited, Axis New Opportunities AIF-I , Mirae Asset Mid Cap Fund, Sundaram Mutual Fund A/C Sundaram Select Micro Cap Series – XIV, IIFL Special Opportunities Fund – Series 4 and ICICI Lombard General Insurance Company Limited.

Objects of the Offer

The net proceeds of the Fresh Issue (OFS money won’t go to company), i.e. Gross proceeds of the Fresh Issue less the Offer Expenses apportioned to the Company (“Net Proceeds”) are proposed to be utilized in the following manner:

1. Repayment/prepayment of certain indebtedness availed by the Company (including accrued interest);

2. Funding working capital requirements; and

3. General corporate purposes

Risks

They operate in a globally competitive industry and face competition from specialty chemicals manufacturers from other countries as well as from imports from low cost manufacturing destinations. Some of global competitors may have certain advantages, including low cost labor, greater financial resources, technology, research and development capability, greater market penetration and operations in India and product portfolios, which may allow its competitors to offer their products competing with them in terms of price and quality.

The continuing effect of the COVID-19 pandemic on business and operations is highly uncertain and cannot be predicted.

They are the largest manufacturer of textile specialty chemicals in India (Source: F&S Report) and business and financial performance is significantly dependent on sale of specialty chemicals to Indian textile manufacturers and export of specialty chemicals to textile manufacturers in Bangladesh, Vietnam, and other global markets. In Fiscals 2020, 2019 and 2018 revenue from sale of TSC products represented 43.71%, 52.13% and 71.54% respectively, of revenue from operations. As a result of dependence on the textile industry, sales volumes, profitability and liquidity are closely tied to the demand for textiles in India and globally and a slowdown in the textile industry may result in a reduction in the volume of its textile chemicals business, which could materially and adversely affect business, financial condition and results of operations.

They currently conduct operations through their sole manufacturing facility located in Silvassa. This facility has an installed capacity of 120,000 MTPA.             

Prior to placing the orders, there is a detailed audit and review process that is undertaken by certain customers. This may involve inspection of the manufacturing facility, review of the manufacturing processes, review of the raw materials, review of financial capabilities, technical review of the specification of the proposed product, review of the company’s logistical capabilities, and multiple inspections and reviews of prototypes of the product.

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They do not have long term agreements with any of raw material suppliers and they acquire such raw materials pursuant to purchase orders from suppliers as a result of which, they are required to forecast supply and demand

Strengths

They enjoy relationships in excess of five years with 12 out of their top 15 customers.

Observations from Financial Statements

Profit & Loss

Balance Sheet

Cash Flows

Major financial metrics are on an uptrend but with upticks in working capital deterrents and increase in trade receivables. Total Debt to equity is also high at 0.64x.

At the same time its cash flow conversion isn’t great as seen above.

Management commentary (as given to CNBC TV 18)

Debt is of Rs 65 cr which is long term. Post ipo, the debt will be retired and they will become completely debt free.

Revenue composition as of March 31, 2020 – 47% from home, personal care + performance chemicals, 42% from technical textiles and  10% from animal health and nutrition.

Top 10 client’s contribution to total revenue– 53% of revenue

Dahej Plant (new plant) – Earmarked 90 cr for this. It is a state of the art fully automated facility which is built with lot of flexibility (just like Silvassa plant). They have spent 75 cr already and first production runs started in 1st week of July with the whole facility expected to be on-stream by March 2021.

Working Capital day 35 days, creditors also same, so it nets off, Working capital is only for inventories. Textile chemicals slowdown?– April May complete lock-down so they got a hit, but because of a lot of flexibility the company follows and they have many products, they were able to get alternate sources of revenue and get over challenges.

Valuation and Peer Comparison

Conclusion

Rossari has good results in FY20 but when compared on an absolute basis, we feel that it’s PE and PBV is quite expensive compared to its listed peers. Taking into account all of the quantitative and qualitative metrics, we have Avoid rating on this IPO.

Disclaimer

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