Hindcon Chemicals NSE SME IPO Review (May apply)

Hindcon Chemicals Ltd. (HCL) is primarily engaged in manufacturing of chemicals particularly for construction industry. It offers a wide range of chemical products which finds variety of applications in the construction sector. Company’s portfolio consists of over 100 products which can be broadly classified into Waterproofing additives for R.C.C. Structures, roof, basement, underground, Plasticizers and Super Plasticizers which are used in Concrete & Mortar mixtures, Concreting Aids which are admixtures/chemicals that provide special properties, Release, Corrosion prevention etc., Sodium Silicate which finds its application in various commodities such pharmaceuticals, building materials etc., Protective and Waterproofing Coatings for walls, roofs, swimming pool, water, Grouts & Repairing Mortar Admixtures which are used in grouting of underground, Shot Crete Aids which are used as accelerating admixtures for dry/wet concrete repair works etc.,  Floor Topping products which are used in making floors more concrete, Sealant Products which are used for sealing of cracks in structural members, Tile Adhesives which are used for fixing of ceramic & mosaic tiles on wall, Epoxy Grout & Mortar which are used for pressure injection into concrete, Foundry Aid which consists of sodium ligno based foundry grade compound, leather tanning, drilling fluid etc., Coating/Impregnation Product for exposed aggregate finish on surface, Cleaning Compound chemicals for removing rust from steel reinforcement, Expansion and Contraction Joint System Products which consist of injection etc.  HCL also undertakes waterproofing and rehabilitation jobs on works contracts basis.

To part finance its working capital and general corpus fund needs, HCL is coming out with a maiden IPO of 2760000 equity shares of Rs. 10 each at a fixed price of Rs. 28 per share to mobilize Rs.7.73 crore. Issue opens for subscription on 26.02.18 and will close on 28.02.18. Minimum application is to be made for 4000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. Issue is solely lead managed by Hem Securities Ltd. and Link Intime India Pvt. Ltd. is the registrar to the issue. Issue constitutes 26.96% of the post issue paid up capital of the company. Average cost of acquisition of shares by the promoters is Rs. 2.69 and Rs. 0.97 per share. Since inception till March 2000 it issued equity at par. Thereafter, it raised further equity in the price range of Rs. 50 to Rs. 500 per share between March 2003 and March 2012. It has also issued bonus shares in the ratio of 4 for 1 in August 2017. Post issue, its current paid up equity capital of Rs.7.48 crore will stand enhanced to Rs. 10.24 crore.

On performance front, HCL has (on a consolidated basis) posted turnover/net profits of Rs. 30.92 cr. / Rs. 0.35 cr. (FY14), Rs. 34.96 cr. / Rs. 0.34 cr. (FY15), Rs. 33.45 cr. / Rs. 0.85 cr. (FY16) and Rs. 34.30 cr. / Rs. 2.10 cr. (FY17). While it suffered a setback in top line for FY 16, it posted higher bottom line. On a static top line, it posted bumper net for FY 17 which is surprising. More surprising is the first half for which it has earned net profit of Rs. 2.16 crore on a turnover of Rs. 18.13 crore. For last three fiscals, it posted an average EPS of Rs. 3.61 and an average RoNW of 9.65% on an equity base of Rs. 1.50 crore as on 31.03.17. Issue is priced at a P/BV of 0.69 on the basis of its consolidated NAV of Rs.40.32 as on 30.09.17 and at a P/BV of 0.81 on the basis of its post issue consolidated NAV of Rs. 34.42. If we annualize latest earnings and attribute it on fully diluted equity post issue, then asking price is at a P/E of around 7.  As per offer documents HCL has shown Pidilite, BASF and Gillandars as its peers on broad base comparison which are trading at a P/E of 51, 41 and 31 respectively. These peers are not strictly comparable with the model of HCL and are thus misleading. Industry composite P/E is around 31.

On merchant banker’s front, this is 35th mandate in last three fiscals (overall 44th mandate so far). Out of last 10 listings, 1 opened at 2.7% premium and the rest at 20% premiums to offer price on the listing day.