Kronox Lab IPO review (Apply)

•    The company is engaged in the manufacturing and marketing of high-purity speciality fine chemicals.
•    It marked steady growth in its top and bottom lines for the reported periods. 
•    It has 185 products in its portfolio and another 122 are in the pipeline.
•    Based on FY24 annualized earnings, the issue appears fully priced. 
•    Investors may park funds for the medium to long term rewards. 

PREFACE:
The company originally filed DRHP for a combo IPO of fresh equity issue worth Rs. 45 cr. and an offer for sale of 7800000 equity shares. According to the Lead Manager, SEBI returned this document saying that company has good earnings and is not in need of cash, hence opt for OFS route only. Based on this suggestion by the regulator, LM refiled the fresh DEHP in January 2024 with requisite size of offer and finally got approval for an OFS of Rs. 130.15 cr.as per final RHP. It is a debt free company as of now and is capable of meeting any fund needs from its internal accruals. Thus at the behest of regulator, the IPO is a fully secondary offer.

ABOUT COMPANY:
Kronox Lab Sciences Ltd. (KLSL) is a manufacturer of high-purity speciality fine chemicals. It manufactures products compliant with reagents, pharmacopeia, and various food grade standards used in the pharmaceutical, nutraceutical, veterinary, food, biotech, chemical analysis and research, metallurgy, personal care and other specialty markets. 

The company's product groups include acetates, carbonates, chlorides, citrates, hypophosphates, nitrates, nitrites, phosphates, sulphates, and other ultra-pure fine chemicals.

KLSL manufactures High Purity Speciality Fine Chemicals for diversified end user industries. Its High Purity Speciality Fine Chemicals are used mainly as (i) reacting agents and raw material in the manufacturing of Active Pharmaceutical Ingredients (APIs); (ii) excipients in pharmaceutical formulations; (iii) reagents for scientific research and laboratory testing; (iv) ingredients in nutraceuticals formulations; (v) process intermediates and fermenting agents in biotech applications; (vi) ingredients in agrochemical formulations; (vii) ingredients in personal care products; (viii) refining agents in metal refineries; and (ix) ingredients in animal health products, amongst others. 

Company's products are manufactured in accordance with industry standards like IP, BP, EP, JP, USP, FCC, LR, AR, GR and ACS in addition to custom manufacturing specifications, which differ from the industry standards, required by its customers in 10 mesh to 100 mesh. Its range of more than 185 products spanning across the family of phosphate, sulphate, acetate, chloride, citrate, nitrates, nitrites, carbonate, EDTA derivatives, hydroxide, succinate, gluconate, among others are supplied to customers in India and more than 20 countries globally. 

In addition to the manufacturing of products in accordance with various domestic and international standards, KLSL also undertakes custom manufacturing to achieve high levels of purity, as specified by the client, having different purity levels than the prescribed industry standards. Custom manufacturing requires deep domain knowledge, expertise and understanding of the characteristics of each chemical and its compounds, including decreasing the level of existing impurities and the processes to be deployed to reach the desired level of purity. 

The company continues to expand its range of products in order to meet changing demands of the end user industries. For the nine months' periods ended December 31, 2023, December 31, 2022 and Fiscal 2023, Fiscal 2022 and Fiscal 2021, it manufactured and sold 188, 155, 157, 156 and 159 products, respectively. The Company's revenue from exports have grown at a CAGR of 37.46% between Fiscal 2021 and 2023. The company has served more than 592 customers during the reported periods, and during the nine months' period ended December 31, 2023 of which 141 customers amounting to 23.82% of total customers placed repeat orders. Its total products under developments were 122 as of December 31, 2023. As of the date of filing this offer document, its product portfolio comprised of over 185 products. As of December 31, 2023, it had total 212 employees (including 155 on contract basis) on its payroll. 

KLSL's blue-chip customer list included name like Sanofi, Divi's, Mankind Pharma, Lupin, Dr. Reddy's, Sun Pharma, Zydus to name a few.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route secondary IPO of 9570000 equity shares of Rs. 10 each to mobilize Rs. 130.15 cr. (at the upper cap). The company has announced a price band of Rs. 129 - Rs. 136 per share. The issue opens for the subscription on June 03, 2024, and will close on June 05, 2024. The minimum application to be made is for 110 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 25.79% of the post-IPO paid-up capital of the company. This being a pure Offer for Sale (OFS), no funds are coming to company. The issue is being made to provide partial exit to some of its stakeholders and for the listing benefits. The company has allocated not more than 50% for QIBs, not less than 15% for HJNIs and not less than 35% for Retail investors. 

The IPO is solely lead managed by Pantomath Capital Advisors Pvt. Ltd. and KFin Technologies Ltd. is the registrar to the issue. Pentagon Stock Brokers Pvt. Ltd. and Asit C Mehta Investment Intermediates Ltd. are the syndicate members for the IPO. The offer document is missing underwriting arrangement info. 

Having issued initial equity shares at par, the company has issued bonus shares in the ratio of 161 for 1 in August 2022. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 0.07 per share. 

This being a pure OFS, post-IPO, company's paid-up capital will remain same at Rs. 37.10 cr.  Based on the upper cap of IPO price band, the company is looking for a market cap of Rs. 504.61 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total revenue/net profit of Rs. 63.24 cr. / Rs. 9.73 cr. (FY21), Rs. 83.34 cr. / Rs. 1.36 cr. (FY22), and Rs. 97.50 cr. / Rs. 1.66 cr. (FY23). For 9M of FY24 ended on December 31, 2023, it earned a net profit of Rs. 1.55 cr. on a total revenue of Rs. 68.44 cr. Thus the company has posted average growth in its top and bottom lines for the reported periods. 

For the last three fiscals, it has reported an average EPS of Rs. 3.71 and an average RoNW of 35.90x%. The issue is priced at a P/BV of 8.37 based on its NAV of Rs. 16.25 as of December 31, 2023, and will remain same on post-IPO basis. However, its IPO ad shows its post-IPO NAV of Rs. 12.04 on the basis of last completed fiscals (which is March 31, 2023 ended period in this case and based on it the issue is priced at a P/BV of 11.30. (According to the lead manager, this is as per the revised guidelines from SEBI on such disclosures). 

If we attribute annualized FY24 earnings to its post-IPO paid-up capital, then the asking price is at a P/E of 24.46. The issue appears fully priced based on its financial performance so far. 

DIVIDEND POLICY:
While the company has not declared any dividends for the reported periods of the offer document, it has already adopted a dividend policy in November 2023 on the basis of its financial performance and the future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Tatva Chintan, Tanfac Ind., Neogen Chem., Sigachi Ind., and DMCC Spl. Chem., as their listed peers. They are trading at a P/E of 82.6, 37.9, 107, 37.4, and 64.8 (as of May 29, 2024). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 8th mandate from Pantomath Capital in the last three fiscals (including the ongoing one). Out of the last 7 issues, all listed with premiums ranging from 27% to 100.45% on the date of listing.