All You Should Know About Chemplast Sanmar IPO

Chemplast Sanmar is the third largest manufacturer of caustic soda and the largest manufacturer of hydrogen peroxide, each in the South India region, on the basis of installed production capacity as of December 31, 2020. It is also one of the oldest manufacturers in the chloromethanes market in India.

CSL also focusses on specialty paste PVC resin and custom manufacturing of starting materials and intermediates for pharmaceutical, agro-chemical and fine chemicals sectors.

It acquired a 100 per cent interest in Chemplast Cuddalore Vinyls Ltd. (CCVL), the largest manufacturer of suspension poly-vinyl chloride resin in India.

In addition, domestic demand for suspension PVC resin is expected to grow at a Compound Annual Growth Rate (CAGR) of 7.5 per cent to 8.5 per cent between Financial Years 2021 and 2025 as per the company’s draft red herring prospectus (DRHP).

CSL believes that it is well-positioned to benefit from the industry growth given the chemicals industry is knowledge intensive, involves complex chemistries, is subject to high quality standards and stringent impurity specifications for processes and product capabilities, and is based on complex products that are difficult to replicate.

CSL has four manufacturing facilities, of which three are located in Tamil Nadu at Mettur, Berigai and Cuddalore, and one is located at Karaikal in Puducherry.

The company has a coal-based captive power plant of 48.5 MW at their Mettur facility and two natural gas-based captive power plants of 8.5 MW and 3.5 MW respectively, at their Karaikal facility.

They have also leased a salt field from the Government of Tamil Nadu at Vedaranyam, Tamil Nadu and have approval from the Tamil Nadu Pollution Control Board (TNPCB) to extract up to 400 kt of salt per annum.

The lease has expired and CSL is in the process of renewing it.

During the CCVL acquisition, the company paid out Rs 303 crore to the promoter entity to buy the entire equity stake. However CCVL was a part of the company until 2019, when it was demerged into a separate PVC-resin company.

Just two years later, the company bought the stake back from its promoters and further invested money into the company in the form of zero coupon compulsorily convertible debentures.

Cyclical Nature of the Industry

The chemical space is known to be highly cyclical. While the outlook for the speciality chemical space remains good, the cyclical nature of the business might create problems for the industry. Chinese supply, which so far has remained low due to environmental concerns, can certainly put margin pressure if it returns.

Rising demand for quality low-cost speciality chemicals is a great tailwind whose continuance is necessary for CSL’s growth.

According to the DRHP: “Our Company’s cost of materials consumed comprised 31.04 per cent, 38.69 per cent, 39.32 per cent and 65.36 per cent of our Company’s total expenses, for the nine months ended December 31, 2020 and the Financial Years 2020, 2019 and 2018, respectively. CCVL’s cost of materials consumed comprised 71.64 per cent, 77.52 per cent and 85.05 per cent of its total expenses, for the nine months ended December 31, 2020 and the Financial Years 2020 and 2019. Further, if we cannot fully offset increases in the prices of raw materials with the increase in the prices of our products, we will experience lower margins.”

Regulatory Risks

The chemical industry is drawing increasing attention due to the hazardous and toxic materials the companies deal with. In the past, the company has faced problems from environmentalists and local people due to allegations of pollution, with protests outside the venue for the annual shareholders’ meeting. In addition, regulators are also focussing on the quality of products, especially in the pharmaceutical products sector.

Corporate History

The company had delisted almost a decade back due to financial and liquidity issues and had a debt-to-equity ratio of 6:1.

In 2019, Fairfax stepped in and infused capital in the company, which was back in business, implying that the chemical business can be gruesome during downturns.

The company has also entered into several related party transactions with the promoter group, which should be monitored.