Archean Chemical Industries Ltd : Subscribe for Listing Gains

Archean Chemical Industries Ltd : Subscribe for Listing Gains
  • Date

    09 Nov 2022 - 11 Nov 2022

  • Price Range

    ₹386 - ₹407

  • Minimum Order Quantity

    36

  • (D) RHP

    View

Archean Chemical Industries is a speciality marine chemical manufacturer focusing on three products namely bromine, industrial salt, and sulphate of potash. The company was the largest exporter of bromine and industrial salt by volume in Fiscal 2021. The company produces its products from its brine reserves in Rann of Kutch, in Gujarat and has a manufacturing facility in Hajipur in Gujarat. The company has 18 global customers in 13 countries with key geographies being China, Japan, South Korea, Qatar, Belgium and Netherlands and 24 domestic customers. It has a business-to-business basis both in India and internationally. The company’s product bromine has applications in pharmaceuticals, agrochemicals, water treatment, oil and gas and in many more industries. Also, the company is the only manufacturer of Sulphate of Potash in the country. Archean Chemicals was also the largest exporter of industrial salt from India exporting 2.7 million MT in Fiscal 2021. For the quarter ended June 2022, the company exported 100% of its industrial salt production. The sales of bromine contributed 50.94%, sales of industrial salt constituted 48.98% and sulphate of potash constituted 0.06% of the total revenue from operations of the company for the quarter ended 30th June 2022. The company has an export-oriented business with almost 67% of its revenue-generating from exports.
Objects of the issue:
The IPO proceeds of the fresh issue will be used towards the following purposes:
  • To carry out Offer for Sale.
  • Repayment Redemption or earlier redemption, in part or full, of NCDs issued by the Company.
  • General Corporate purposes.
 
Investment Rationale:

Market leadership and opportunities to further expand

The company has been a market leader in speciality marine chemicals since 2013 and is also the largest exporter of bromine and industrial salt by volume. Also, it has one of the lowest costs of production globally for both of these products. The company has long-standing relationships with its international as well as domestic clientele and huge room to expand due to its robust infrastructure capacity and demand for the products. It has also expanded its bromine capacity with an addition of a feed enrichment section. The company also is the only manufacturer of sulphate of potash that has a great demand due to its use in fertilizers and certain medical uses.

High Barriers to entry into the industry

The speciality chemical industry has high entry barriers viz. High cost of production and manufacturing, scarcity of raw materials, a significant investment for salt beds etc. The company is already well-established in the industry and has numerous customers globally. Also, other barriers such as stringent regulatory and quality standard requirements from the end user increase the competition for customer acquisitions. The company has developed a strong relationship with its clients which makes it difficult for other players to enter the industry.

 
Valuation and Outlook:
The global chemical market is expected to grow to a size of approx $6143 billion by 2025 and coupled with the rapid growth across sectors the company carters provides the company with a strong momentum to grow further. Being an export-oriented business with a strong client portfolio gives the company a competitive advantage over its peers. It also has an established infrastructure and integrated production has one of the largest salt works at a single location according to industry reports. The manufacturing facility of the company is also located nearby ports through which it caters to international clients helping the company reduce its logistics and storage costs. The company has also displayed a strong and consistent financial performance with revenue from operations increasing at a CAGR of 36.34% from Fiscal 2020 to 2022 and a robust EBITDA margin of 42% for FY22. However, exchange rate fluctuations and other geographic, economic and regulatory changes are key risk factors for the company. On the upper end of the price band, the issue is valued at a P/E of 22.3x based on FY22 consolidated earnings which we feel is fairly priced and hence initiate a “SUBSCRIBE” rating to the IPO for the benefit of listing gains.