Anand Rathi said higher multiple is justified given the company’s ability to grow profitably and command better return ratios. Hence it recommended subscribing the issue
The initial public offer of Neogen Chemicals, manufacturers of bromine and lithium chemical compounds, is scheduled to open for subscription on April 24 with a price band at Rs 212-215 per share.
The company aims to raise up to Rs 132 crore through the IPO, which will close on April 26.
The IPO is a combination of fresh issue of Rs 70 crore and offer for sale by promoters. The company would utilise net proceeds from fresh issue for debt repayment, early redemption of fully redeemable cumulative preference shares and working capital requirement.
With increased capacity through expansion and acquisition, the company reported 19.7 percent YoY CAGR rise in consolidated operating revenue over FY14-18 to Rs 164.01 crore in FY18.
The specialty chemicals maker reported a 26.1 percent CAGR rise in consolidated EBITDA (earnings before interest, tax, depreciation and amortisation) over FY14-18 to Rs 28.99 crore in FY18. EBITDA margin improved from 14.4 percent in FY14 to 17.7 percent in FY18. The company reported a 30.3 percent CAGR rise in reported PAT over FY14-18 to Rs 10.5 crore in FY18.
Brokerages are mixed on whether to subscribe to the issue. Choice Broking advises avoiding the issue as the issue is overpriced. "At the higher price band of Rs 215 per share, Neogen's share is valued at a P/E multiple of 47.8x (to its restated FY18 EPS of Rs 4.5), which is at a premium to its peer average of 38.8x," it reasoned.
On the contrary, Anand Rathi said higher multiple is justified given the company’s ability to grow profitably and command better return ratios. Hence it recommended subscribing to the issue.
Here is what brokerages say about the issue:
Choice Broking: Based on FY19E and FY20E EPS, the stock is valued at P/E multiple of 32.2x and 26x, respectively, which again is available at a premium to peer average.
However, considering its historical growth profile, proposed expansion activities and the demanded valuations we feel that the issue is fully priced.
Thus we assign a 'avoid' rating for the issue. The issue size (around Rs 130 crore) being lower than Rs 250 crore, the shares will be listed in T-group. Hence, there will be some restrictions on price movements.
Anand Rathi: At the higher end of the issue price of Rs 215 a share, the stock is valued at around 20.1x FY18EV/EBITDA and around 47.8x P/E. Arti Industries and Atul Industries trade at FY18 P/E multiples of 38-42, while Vinati Organics and Navin quote at respectively 21x and 63x.
On the annualised 9MFY19 EPS of Rs 7, the stock is priced at 28.5xPE and 17.4x EV/EBITDA. We believe the higher multiple is justified given the company's ability to grow profitably and command better return ratios.
Risks to its recommendation are slow growth in underline sectors such as pharma, high working capital intensity and high debt great dependence on certain customers.
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