Neogen Chemicals IPO set to open: Why are some analysts giving it ‘avoid’ rating

NEW DELHI: The Rs 132 crore initial public offering (IPO) of specialty chemicals firm Neogen Chemicals will kick off on Wednesday. The company on Tuesday said it has raised Rs 39.70 crore from a total of seven anchor investors at Rs 215 per share, the upper end of its price band.

Analysts say valuations are mostly pricing in earning prospects, leaving little room for short-term gains.

One may subscribe to this IPO with a long-term horizon or give it a miss, multiple analysts said.


The IPO comprises a fresh issue of shares aggregating up to Rs 70 crore and an offer for sale (OFS) of up to 29 lakh shares by promoters Haridas Thakarshi Kanani and Beena Haridas Kanani.

At the upper limit of the price band of Rs 212–215, the issue is demanding a P/E valuation of 47.8 times on a FY18 EPS of Rs 4.5, which is at a premium to its peer average of 38.8 times.


“Based on FY19E and FY20E EPS, the stock is valued at P/E multiples of 32.2 times and 26 times, respectively, which is at a premium to the peer average. However, considering its historical growth profile and proposed expansion activities, we feel the issue is fully priced. Thus, we assign an ‘avoid’ rating for the issue,” said Choice Broking.

With the issue size being lower than Rs 250 crore, shares will be listed in the ‘T’ group, which means there will be some restrictions on price movements, the brokerage said.

Anand Rathi Financial Services justifies the company’s demanding multiples, citing its ability to grow profitably and command better return ratios.

It counted slow growth in underline sectors such as pharma, high working capital intensity, high debt and dependence on certain customers as key risks.

Neogen’s listed peers Aarti Industries, Atul, Navin Fluorine International, Vinati Organics and Paushak have had a good run on the bourses over the past three years.

Neogen makes organic chemical compounds – Bromine compounds and other organic compounds containing chlorine, fluorine and iodine-based and combination – used in application industries such as pharmaceutical, agrochemical, flavour and fragrance and electronic chemicals.

Besides, it makes inorganic chemicals primarily comprising lithium compounds used in vapour absorption machines (VAM) and heating ventilation and air-conditioning (HVAC) and refrigeration, construction chemicals, pharmaceutical and specialty polymer. Organic chemicals account for 60-70 per cent of the company’s revenues while the rest comes in from inorganic chemicals.

The company said its standalone total income and profit grew at a compounded annual growth rate (CAGR) of 19.66 per cent and 30.61 per cent, respectively, during FY14-18. On a consolidated basis, total income and profit after tax rose 19.69 per cent and 30.29 per cent, respectively.

The company has two active manufacturing sites. One is in Mahape, Navi Mumbai, which is leased by Maharashtra Industrial Development Corporation (MIDC) and used to make both organic and inorganic chemicals. The other is in Vadodara, which is a freehold land used to make inorganic chemicals. Capacity utilisation levels at these facilities stood at 60-85 per cent.

The company has also invested in a 50,000 square meter plot in Dahej SEZ, leased from Dahej SEZ, on which it plans further investment in machinery to set up the first phase capacity to produce lithium inorganic chemicals of about 12,00,000 tonnes per annum.

The company expects the plant to be operational by FY20. Besides, it plans to invest an additional 126,000 litre glass-lined reactor capacity in Vadodara, which is expected to be operational by FY20.

By 2022, the global specialty chemicals market is expected to grow at a 5.47 per cent CAGR to $970.55 billion. The steady growth is likely on sustained demand in end-user industries. In India, the industry is highly fragmented, with small and medium enterprises commanding 70-75 per cent of market share. Analysts say growth opportunities are immense in this space.