Company: Chemcel Biotech
Issue opens: September 9
Issue closes:September12                                                                                                               Issue Price: Rs. 16 per Share 

Chemcel Biotech, an agro chemicals company based in Andhra Pradesh, plans to raise Rs 24.64 crore through an IPO by offering shares at a fixed price of Rs 16 each.

Company Product Profile

Chemcel Biotech manufactures and supplies pesticide products used for different crops such as paddy, cotton, sugarcane, turmeric, chillies, pulses and vegetables. However, the company is a regional player with a presence in Andhra Pradesh.

Chemcel is a relatively small player with an annual turnover of Rs 24.57 crore. It faces stiff competition from the unorganised as well as other large organised players like such as United Phosphorus, Rallies, Bayer Crop Science and Syngenta.

Future Plans

The company plans to enter the promising bio-diesel segment, by manufacturing and supplying it to oil marketing companies. Bio-diesal is used for blending with oil to reduce the overall cost of oil.

Chemcel Biotech is setting up a crushing capacity of 20 tonne per day, which will be commissioned by June 2009 and will be fully operational by September 2009.

Raw Material

 The company will procure its raw material (including jatropha seeds, Pongamia, Neem, palm oil seeds and cotton seeds) from its subsidiary companies, where it is holding equity stakes to the extent of 65 per cent. Chemcel will be able to produce bio-diesel (300 litres per tonne of input) and other by-products such as glycerin (30kg per tonne of input) and cake (700 kg per tonne of input). Though the opportunity is large, it will partly reflect in revenues in FY10 and fully by FY11.

Concerns

Although the industry has grown at about 3-4 per cent annually, given the company’s small base, its growth in revenues at merely 17.6 per cent over the last four years.

Climatic conditions can impact earnings of the industry, seasonality of the business (long credit period to farmers) is also a concern as it means high working capital requirement.

This is also evident from the company’s plan to further infuse Rs 9.45 crore towards working capital for expanding its agro chemicals business. Until now, the company has not been able to fully utilise its existing manufacturing capacities (utilisation in the three product categories has been low at 3-58 per cent), which can only be improved by infusing additional working capital.

In the near term, growth will emanate from agro chemicals but, in the longer term growth could come from the bio-diesel business.

IPO Valuation

With regards valuations, the issue is expensive. At the offer price of Rs 16, the PE works out to 34 times its FY08 fully diluted earnings. Even after considering the future growth prospects (about 31 per cent, based on 10 per cent growth in agro chemicals business as well as revenues from the bio-diesel business) and estimated FY11 earnings of Rs 1.1 per share, the PE works out to