Citichem India BSE SSME IPO review (Avoid)

•    The company is mainly engaged in supplying third party products in organic/inorganic chemicals, bulk drugs, food chemicals, etc.
•    It marked drastic degrowth in its top lines for the reported periods, but net margin surge from FY24 onwards raise eyebrows and concern over its sustainability.
•    Higher spending for IPO process hints at structured and managed funding.
•    Small equity base post-IPO indicates longer gestation for migration.
•    Based on its recent super earnings, the issue appears aggressively priced. 
•    There is no harm in skipping this “High Risk/Low Return” bet.

ABOUT COMPANY:
Citichem India Ltd. (SCL) is mainly engaged in the buying, procuring, and supplying, of organic and inorganic chemicals, bulk drugs, and, food chemicals to pharmaceutical industry. The traded speciality chemicals and intermediates have a wide application in aluminium, steel, textiles, paper, dairy, paints, dyes & intermediates, soap making, pharma, food and adhesive Industry. The Company also supplies food preventives and chemicals under its own brand name which is thereafter converted into sales in their own books by the distribution team who ensures safe delivery of bulk supply. 

The said works are primarily sourced through its leased Registered Office located at Khand Bazar, Masjid Station, Mandvi, Mumbai - 400003, Maharashtra, India. As of June 30, 2024, it had just 9 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden IPO of 1800000 equity shares of Rs. 10 each at a fixed price of Rs. 70 per share to mobilize Rs. 12.60 cr. The issue opens for subscription on December 27, 2024, and will close on December 31, 2024. The minimum number of shares to be applied is for 2000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 26.47% of the post-IPO paid-up capital of the company. The company is spending Rs. 1.51 cr. (12%) for this IPO process, and from the net proceeds of the IPO, the company will utilize Rs. 3.60 cr. for capex on property acquisition, Rs. 4.69 cr. for purchase of transportation vehicles and accessories, and Rs. 2.80 cr. for general corporate purposes

The IPO is solely lead managed by Horizon Management Pvt. Ltd., and KFin Technologies Ltd., is the registrar to the issue. Aftertrade Broking Pvt. Ltd., is the Market Maker for the company. The issue is underwritten up to 15% by Horizon Management and 85% by Aftertrade Broking. 

Having issued initial equity shares at par value, the company issued further equity shares at a fixed price of Rs. 100 per share in March 2001. The average cost of acquisition of shares by the promoters is Rs. 9.22, and Rs. 10.00 per share. 

Post-IPO, company’s current paid-up equity capital of Rs. 5.00 cr. will stand enhanced to Rs. 6.80 cr. Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 47.60 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 85.28 cr. / Rs. 0.24 cr. (FY22), Rs. 20.94 cr. / Rs. 0.36 cr. (FY23), and Rs. 19.61 cr. / Rs. 1.12 cr. (FY24). For Q1 of FY25 ended on June 30, 2024, it earned a net profit of Rs. 0.20 cr. on a total income of Rs. 1.49 cr. The sudden boost in its bottom lines amidst declining top line is a surprising matter, perhaps the company has a magic wand.

For the last three fiscals, the company has reported an average EPS of Rs. 1.74 and an average RoNW of 10.37%. The issue is priced at a P/BV of 4.70 based on its NAV of Rs. 14.90 as of June 30, 2024, and at a P/BV of 2.37 based on its post-IPO NAV of Rs. 29.49 per share (at the upper cap).

If we attribute FY25 annualized super earnings on post-IPO fully diluted equity capital, then the asking price is at a P/E of 59.83, and based on FY24 earnings, it stands at 42.68. The issue relatively appears aggressively priced.

For the reported periods, the company has posted PAT margins of 0.28% (FY22), 1.73% (FY23), 5.70% (FY24), 18.18% (Q1-FY25), and RoCE margins of 5.97%, 7.89%, 21.47%, 3.30%, for the referred periods respectively. 

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. 

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown Shankar Lal Rampal, Vinyl Chemicals, as their listed peers. They are trading at a P/E of 58.6, and 25.7 (as of December 24, 2024). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER’S TRACK RECORD:
This is the 12th mandate from Horizon Management in the last two fiscals, out of the last 11 listings 4 listed at discount, while others listed with premiums ranging from 3.05% to 129.17% on the date of listing.