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Neogen Chemicals IPO opens; should you subscribe? Here's what analysts say

The initial public offer (IPO) by Neogen Chemicals, a leading manufacturer of bromine and lithium-based specialty chemicals, opens today. The IPO comprises an offer for sale (OFS) of 2.9 million equity shares, aggregating Rs 62.4 crore and fresh issue of 3.2 million equity shares aggregating Rs 70 crore in a price band of Rs 212 - Rs 215.


Incorporated in 1991 in Mahape, Navi Mumbai, Neogen Chemicals is one of India’s leading manufacturers of bromine-based, and lithium-based, specialty chemicals. Over financial years 2014-18 (FY14-18), it reported revenue, EBITDA and PAT (profit after tax) CAGRs (compound annual growth rates) of nearly 22 per cent, 26 per cent and 30 per cent, respectively. Its EBITDA (earnings before interest, tax, depreciation and amortisation) margin expanded 244 basis points (bps) to 18 per cent. Its return on equity (RoE) and return on capital employed (RoCE) have averaged nearly 20 per cent and nearly 15 per cent, respectively over FY14-18.

Over the years, Neogen Chemicals has broadened the number of its products 198, comprising 181 organic and 17 inorganic chemicals. It has installed capacity for 1,30,400 litres of organic chemicals and 1,200 tons of inorganic chemicals, with utilisation at respectively 64 per cent and 94 per cent.


Most analysts advise investors give the offer a miss given high valuations. For instance, AK Prabhakar, head of research at IDBI Capital, says the issue is too expensive and leaves nothing much on the table for investors. "Peers such as Aarti Industries and Atul Industries are trading at much lower valuation. Neogen's steep price is not justifiable," feels Prabhakar. 

At the higher end of the issue price of Rs 215 a share, the stock is valued at nearly 20.1x FY18 EV/EBITDA (enterprise value/earnings before interest, tax, depreciation and amortisation) and nearly 47.8x P/E (price to earnings). In comparison, Aarti Industries and Atul Industries trade at FY18 P/E multiples of 38-42, while Vinati Organics and Navin Flourine International quote at 21x and 63x, respectively. 

Umesh Mehta, head of research at SAMCO Securities agrees. "Given its return ratios are lower than the industry or at par, the issue is fully priced. Also, high raw material costs and debt to equity ratio are deterents to company's operational efficiencies. Investors should avoid," Mehta suggests.  

However, analysts at Anand Rathi Financial Services, believe the higher multiple is justified given the company's ability to grow profitably and command better return ratios. Neogen plans to double capacity to around 256,000 liters and 2,400 tons of organic and inorganic chemicals to cater to the demand. It is trying to forward-integrate bromination with other chemistries to make advanced intermediates, otherwise being manufactured by customers in-house. The brokerage has a 'subscribe' rating on the issue. 

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