Rossari Biotech Ltd - Can growth justify expensive valuation?

Stock Opportunities Untested - but worth a good look
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Hi everyone,
I wanted to discuss an upcoming IPO - Rossari Biotech which looks really interesting given recent market share gains, relatively smaller size and its unique flexible chemical manufacturing capabilities where company can interchange capacities across its segment categories and can manufacture any products depending on customer requirements (I am not sure if there are any other chemical companies with similar flexible business model). They also make ingredients and final products (BOTH) for their customers.

Rossari Biotech Ltd

Rossari Biotech is a specialty chemical manufacturing company which provides customized solutions to specific industrial and production requirements of customers primarily in the FMCG, apparel, poultry and animal feed industries through our diversified product portfolio comprising home, personal care and performance chemicals (HPPC); textile specialty chemicals; and animal health and nutrition products. Company operates in India as well as in 17 foreign countries including Vietnam, Bangladesh and Mauritius. According to the F&S Report, as on September 30, 2019, we are the largest manufacturer of textile specialty chemicals in India providing textile specialty chemicals in a sustainable, eco-friendly yet competitive manner. As a manufacturer of specialty chemicals, we focus on functionality and application of our products which form a key ingredient to our customers’ manufacturing and industrial processes.

Background
Promoters, Mr. Edward Menezes, and Mr. Sunil Chari, commenced this business in 2003. Both are career technocrats cumulatively having over 45 years of experience in the specialty chemicals industry. Promoters along with experienced Key Managerial Personnel who have over 80 years of experience in the specialty chemicals industry cumulatively.

  • Edward Menezes was previously associated with Clariant India Ltd (Red flag? as Clariant India had some corporate governance issue; see video from Candor Investing on Clariant https://youtu.be/xigATYEOfiY). He has over 25 years of experience in the specialty chemicals industry and has more than 10 years of experience in different roles within the company and has been actively involved in the day-to-day running of the company.

  • Sunil Chari is the Promoter and Managing Director of the company. He has over 20 years of experience in the specialty chemicals industry. He has more than 10 years of experience in different roles within the company and has been actively involved in the day-to-day running of the company.

Products and end market TAM

  • Home, personal care and performance chemicals (HPPC)
    Rossari claims to be leading manufacturer of acrylic polymers in India (Source: F&S Report) and manufactures over 300 products in the soaps and detergent, paints, inks and coatings, ceramics and tiles, water treatment chemicals and pulp and paper industries. Rossari also manufactures institutional cleaning chemical formulations for hospitality, facility management, airports, corporates, food service, commercial laundry, malls, multiplexes, educational sector, places of worship etc. Company primarily operates in B2B model for our home, personal care and performance products with some direct selling to consumers under private label or on Amazon. HPPC constituted 46.11% and 37.81% of H1-20 and FY19 revenues respectively.
    TAM - Rossari has ~10% market share (F&S report) with addressable market in India ~USD 1.6 billion. The personal care ingredients market is divided into active and
    inactive ingredients. Company has presence in inactive ingredients with focus on silicone ingredients. This segment is 32% of the inactive ingredients market and 21% of total personal care ingredients market (active and inactive). The addressable market for Company in India personal care ingredients is approximately USD 0.8 billion. (Source: F&S Report).

  • Textile specialty chemicals
    Rossari Biotech is the largest manufacturer of textile specialty chemicals in India (Source: F&S). Company sells specialty chemicals for the entire value-chain starting from fiber, yarn to fabric, wet processing and garment processing and manufactures/sells ~1,520 products. These chemicals are used to enhance hydrophilic properties, anti-microbial properties, flame retardant properties, fragrance, water repellents and UV absorbing properties of the textiles. Revenue from textile chemicals constituted 44.82% and 52.18% of H1-20 and FY19 revenues respectively. Since textile industry consumes large amount of water and contributes to water pollution, Rossari focuses on providing eco-friendly chemical solutions which either replaces the highly polluting chemicals or reduces environment pollution of existing industrial process.
    TAM - TAM Indian textile specialty chemicals is approximately USD 1.2 billion. Global green chemicals market is expected to grow at a CAGR of 10.5% during 2019 to 2023. According to the F&S Report,

  • Animal health and nutrition
    Rossari diversified into animal health and nutrition and supplies poultry feed supplements and additives, pet grooming and pet treats including for weaning, infants and adult pets. Company mainly sells products through B2B through distributors. Revenue from sale of animal health and nutrition products constituted 9.08% and 10.00% of H1-20 and FY19 revenues respectively.
    TAM - TAM in Indian animal health and nutrition products is ~USD 0.14 billion. (Source: F&S Report)

New product pipeline - expanding to newer end markets!
Product and end uses

  1. Cement and construction chemicals: Specialty additive for cement processing
  2. Water treatment formulations: Boiler chemicals, Cooling tower chemicals, RO chemical, Waste water treatment
  3. Specialty formulation for breweries as well as dairies: Hinder bacterial growth, Break molasses, Cleaning sugar syrup
  4. Sanitizers for electronic gadgets: Mobile-antibacterial sanitizers for screens, Non-alcohol sanitizers
    TAM for Construction chemicals market and water treatment formulations market is ~USD 1.1 billion and USD 1.7 billion respectively.

Expansion plans - planning to more than double existing capacity within FY21
Rossari’s existing plant in Silvassa has an installed capacity of 120,000 MTPA. Silvassa facility has flexible manufacturing capabilities for powders, granules and liquids. Silvassa capacity utilization was at 74.19%/93.94%/82.46% in Fiscal 2018/19/20.
New Dahej manufacturing facility has a proposed installed capacity of 132,500 MTPA. The Dahej Manufacturing Facility will also enjoy a proximity to the deep-water, multi-cargo port of Dahej which is a cost and logistical advantage. The proposed facility will be commissioned in Fiscal 2021.

R&D - competitive moat!
Rossari has qualified and experienced in-house R&D team which focuses on the new product development by collaborating with customers and customizes products as per customer expectations. Company has two R&D facilities – one within the Silvassa Manufacturing
Facility and another one in Mumbai (in IIT Mumbai). R&D facilities are recognized by the Department of Scientific and Industrial Research, Government of India and are also certified by a number of organizations including the Global Organic Textile Standards and the American National Standards Institute.

Financials - impressive!

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Valuation
IPO is coming at Rs. 423-425 which is slightly higher on PE basis (33.8) vs. peers.

Key risks and Red flags - looking for more on this from respected VP members

  1. Conflicts of interest may arise out of common business objects shared by our Company and some of our Group Companies and members of the Promoter Group. Certain our Group Companies, namely RBIPL, RMIPL and RSCPL and certain of the members of the Promoter Group, namely Rossari Hydra Chemicals Private Limited and Suisse Silicon Specialties Private Limited, share the common business objects and the constitutional documents of these Group Companies and members of the Promoter Group permit them to operate in the same line of business as us, which may lead to competition with such Group Companies and members of the Promoter Group. We may hence have to compete with such Group Companies and members of the Promoter Group for business, which may impact our business, financial condition and results of operations. The interests of our Group Companies and members of the Promoter Group may also conflict in material aspects with our interests or the interests of our Shareholders. Further, a conflict of interest may occur between our business and the business of such Group Companies and members of the Promoter Group in which our Promoters and Directors are involved with, which could have an adverse effect on our operations.
  2. Edward Menezes was previously associated with Clariant India Ltd (Red flag? as Clariant India had some corporate governance issue; see video from Candor Investing on Clariant https://youtu.be/xigATYEOfiY).
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Silvassa plant existing capacity is 1,00,000/- tonne but is being expanded to 1,20,000/- tonnes by March 21. I feel the capacity expansion and new capacity , both will get delayed by at least 6 months because of Covid. I could see that cash flow from business activity is negative while there is no substantial CWIP. I am not a financial expert and request experienced members to comment on balance sheet.
The face value of share being Rs 2/- at issue price of RS 425/-, the effective price is RS 2125/- equivalent to a RS 10/- face value share with z P/E of around 33, hence appears to be fully priced.
Members having in-depth knowledge on chemical industry may PL give their views.

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@atul1082 Silvassa plant was already utilized upto ~94% capacity utilization (120,000 MTPA) in FY19. Today company briefed investors over zoom call (youtube link: https://youtu.be/pOVxzzW6HO4) an said that they have already commenced operations at Dahej facility (132,500 MTPA) and expects to begin at 20-25% cap. utilization with expectation of ramping fully by March-2021.

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Isnt the PE valuation to sales too high? or when compared to other chemical companies?
IPO PE : 33.81
2019 the sales grew about 18% where as earlier it grew about 77%

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but wont the growth be fueled by capex and capacity expansion?

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Capex and capacity expansion can be done by any company (check for ex : Suzlon not an good example or peer comparison at this case but for your question it will show growth is not on co expansion) which might not be an good factor to consider when u talk abt growth… it ultimately boils to the demand, sales & management strategy to gain market share and drive the company… the capex co is willing to do will be an extra weight that the co has to pay…
Rossari has good products in line and supplies to HUL and other giants… I feel that valuation is too high with PE 35 and facevalue : 2… the company before ipo has done stock split and promoters raising this ipo will be factor to cover up capex via equity capital or may be someother way… the company has majority of ladies working and co has good balance sheet given from past records…

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I agree. But with 94% plant utilization this might be the right track. I was going through the management interview and they seemed pretty confident with their Home & personal care category. In fact, they said it has been doing better than pre-covid days for obvious reasons. For capex & capacity they again said they are confident and this would fuel growth for next 4-5years for them without divulging details right now.

I agree with you the valuations are actually high and they could have left something on table. But the question is if the margins are maintained in the same way, the company can be valued at attractive valuations specially right now when the red hot sectors are the one where Rossari Biotech deals in.

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Is everyone convinced about the objectives of this issue? For, I am not.
The following are its objectives:

  1. Repayment/prepayment of certain indebtedness availed by the Company (including accrued interest);
  2. Funding working capital requirements; and
  3. General corporate purposes

Do we have a break-up of how they are going to use the proceeds?

One should prefer a Company using funds for expansion / acquisition. That is not the case here. Why are they raising funds for repaying debt in a difficult market?

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It is indeed amazing to find an IPO of speciality chemicals bang at the time when 99% of investors are talking about speciality chemicals. Objective of issue seems to give investors what they wanted so much…
Disc - Not aware much about company and not interested. May be wrong and it can be excellent investment…

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Hot IPO of hot sector. Pe of 30 way too expensive

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The company is v much comparable to Galaxy surfactants except the fact that the current sales of Galaxy are 3 times that of Rossari with EPS around 4times.The product, current profit margins are almost similar. I think it’s apple to apple comparison.Its shares were issued at around 1490/- per share with FV of RS 10/- and the shares are hovering around RS 1600/- after 2.5 years.So I believe that the next 2years earning are already in price.Views of members invited PL.

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Rossari know that people will be excited about their IPO since it belongs to the chemical sector and that is all the rage atm. It will probably get fully subscribed and it will really help the company especially during a tough covid period. It’s a smart move by them. But that doesn’t mean it ll be a smart move for us at its current price and FV of 2 especially when there are alternatives already available in the market who carry less of a risk at that valuation. There will be a huge potential for listing gains due it being an IPO (after ages) set in the chemical sector but most of us are here for the long term and long term I’d look to enter in a year or two if the valuations prove correct/there’s a huge correction.

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I feel higher growth compensates for higher valuations, no?

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The sales growth last year ie FY20 was just 18% whereas the previous year was an unsustainable 77%. Expect the future to be on and around 18 so making it the same valuation as all those other proven stocks that you mentioned

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Last year, they were constrained for capacity in their Silvassa plant. Capacity utilisation dropped from 94% to 83%… despite that they were able to clock 18% topline growth and 40% pat growth.
This year they’ve already started Dahej operations at 20-25% capacity utilisation since July and they expect to fully ramp up by march-21

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Cheers Kushal. This is why getting the full story for each year matters. I was just looking at the figures tbh… 77 seemed to high so I just discounted everything. Going to do more of a deep dive now.

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@Investor_No_1 @atul1082 @Ajjugattu I agree Chemicals is a THE hot sector now post COVID… but they didn’t actually plan to launch this IPO now. They were actually planning to launch in late March when things were okayish-to-good for Chemical sector (but not as good vs what we have right now).

We also need to think that In pre-IPO offer in Feb, 15 marquee investors (Malabar, Mirae, Axis etc.) invested into Rossari at same Rs 425 price at even higher valuations vs. what we have right now. (https://www.vccircle.com/adia-sumeet-nagar-s-hedge-fund-among-anchor-investors-in-rossari-biotech-s-ipo/)

Since management looks clean to me (I invite everyone to look for red flags in Rossari coz I didn’t find anything meaningful), I will believe what management has said ie. 100% additional capacity at Dahej will be good enough to take care of growth for 3-4 years. This implies 15-20% topline growth with increased margins (as seen in the last 3 years due to higher contribution from HPCC segment which looks to be a higher margin business) and slightly higher bottom line growth which might have an upside risk due to further efficiency from newly built Dahej plant.
Sharing my thought process here for constructive criticism from fellow VP’s while still searching for negatives on corporate governance or on any business segments.

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Go through this… Gives idea about their competition in all the sections, i.e. Home, textile and animal feeds etc.

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They Got HUL as client few years back maybe that’s why the jump upto 77%. their home and personal section used to be some 17-18% now it is 43% something… Same with Textile… That’s why that jump.

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From Fy17 to Fy20, EBIDTA margins have moved from 9.2% to 17.5%.
During this period, contribution of Textile chemicals has moved from ~88% to 48% while HPC segment has moved from 12% to 52%.
This shows clear correlation between EBIDTA margins and increasing share of HPC segment.
I did some back of the envelope calculations and using some approximations, probable margins for Textiles segment comes to 11-13% while HPC segment margins are in between 21-24%.
I have used Weighted method average to calculate approx Ebidta margins.
Going with the current trend, contribution of HPC segemment should increase. Combining with new facility (which management has hinted that it could have better efficiencies), there are good chances that Ebidta margins will inch higher going ahead.
As Mr. Ramdeo Agarwal has said, “if margins can double, 30PE stock becomes 15PE”. While doubling of margin does not look feasible, but it should inch towards 20%
Risks/Concerns:
The business is not following cost plus model, and does not seem to have much pricing power: "we cannot assure you that in the event of a slowdown in the textile industry
our customers will not opt for cheaper alternatives offered by our competitors. These and other factors may
negatively contribute to changes in the prices of and demand for our textile chemical products in India and
may adversely affect our business, results of operations and financial condition."
"Increase in the cost of raw materials as a percentage of our revenue could have a material adverse effect
on our results of operations and financial conditions."
Further, the price of our product is generally fixed at the time the purchase order is issued to us by our
customer and therefore we may not be able to pass on an increase in raw material to our customers.

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