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    Rossari Biotech issue may ride on gains from Covid-led demand

    Synopsis

    The IPO is expected to test investor appetite at a time when consensus earnings are likely to contract for the first time in decades. The company’s asking price-to-earnings multiple is at the higher end of its price band and equivalent to large-sized industry counterparts, indicating that quality is being offered at a handsome price.

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    The IPO is expected to test investor appetite at a time when consensus earnings are likely to contract for the first time in decades.
    ET Intelligence Group: Rossari Biotech is set to break a four-month dry spell in initial public offerings (IPOs) on Monday, as a surge in demand for household hygiene products in the wake of the coronavirus pandemic looks likely to prove beneficial for the specialised chemicals maker.

    The IPO is expected to test investor appetite at a time when consensus earnings are likely to contract for the first time in decades. The company’s asking price-to-earnings multiple is at the higher end of its price band and equivalent to large-sized industry counterparts, indicating that quality is being offered at a handsome price.

    High-risk investors may look at the IPO for relative outperformance with peers thanks to superior revenue growth; the rising proportion of home, personal and performance chemicals (HPPC) segment in its revenue.

    Business: Mumbai-based Rossari manufactures chemical ingredients for soaps, detergent, pulp and paper, paints, ceramics, water treatment and apparel. It supplies anti-deposition additives used in detergents. It supplies ingredients and formulations and does both private-label and contract manufacturing for the likes of Hindustan Unilever, Rohit Surfactants (Ghadi brand detergent) and B2B supplies to IFB and Bosch. It also supplies to Arvind, Raymond and Bhaskar Denim.

    In FY20, it derived nearly 46.8 per cent of revenue from the HPPC segment, followed by 43.7 per cent from textile specialty chemicals and the remaining from animal feed nutrition. The share of the HPPC segment in total revenue rose 2.5 times in the last three fiscals, with the segment benefiting from higher demand for disinfectants and sanitisers due to Covid-19 outbreak.
    IPO-graph

    Growth triggers: The company offers affordable solutions to customers. For instance, it lowered the smudge generated after washing, by lowering the alkali content, and added in-house surfactants to increase cleaning performance. It is also working to launch products in the anti-microbial and electromagnetic protection range for textiles and looking at formulations for water treatment plants.

    Financial performance: The company’s revenue grew 42 per cent annually to 600 crore between FY18 and FY20 while operating profit grew 56 per cent. Operating profit margins stood at 17.5 per cent in FY20, a gain of 320 basis points from FY18 level. The company had a capacity of 120,000 MTPA and a utilisation of 82 per cent at the end of FY20. Volumes grew 39.4 per cent annually in the past two fiscal years. The company is expanding its installed capacity to 252,000 MTPA, which is expected to be commissioned by the end of FY21.

    Risk Factors: The company does not have long-term contracts with customers, while its capacity will rise four-fold in just four years. Inability to find new customers or higher wallet share could weigh on capacity utilisation and margins. The return on capital employed (RoCE) at the end FY20 stood at 24.8 per cent while its return on equity (RoE) was 31.8 per cent. These are quite lucrative to attract new players and may also lead to pricing pressures.

    Valuations: At the higher end of the price band, the asking PE is 33 times FY20 earnings, a 12 per cent premium to the average of its peers. Rossari had superior volume and revenue growth and return ratios in the last two fiscals.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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