Omkar Specialty Chemicals IPO Analysis

Omkar Speciality company, promoted by Pravin Herlekar and Omkar Herlekar, is mainly engaged in the manufacture and sale of specialty chemicals: selenium compounds, iodine compounds, and molybdenum compounds, and pharmaceutical intermediates: potassium iodate, bismuth ammonium citrate, and bromoform.



The company has four units at MIDC, Badlapur (E), Thane, Maharashtra. At present, it is carrying out manufacturing activities at two of its unit with current total installed capacity of 750 tonnes (t). Omkar Chemicals was formed in 1983 with capacity of 6 t per annum for manufacture of molybdenum derivatives. The company has recently set up a new manufacturing facility at Badlapur, Thane, Maharashtra, with an installed capacity of 200 t. Commercial production at Unit 3 is likely to start in March, 2011. Post expansion total installed capacity will increase to 950 t.

The company proposes to expand its existing manufacturing capacities at Unit 1, Unit 2 and Unit 3 by 1,450 t per annum (tpa). It also intends to set up a new manufacturing facility with an installed capacity of 1,250 tpa at its Unit 4 to produce new molecules in the Iodine derivates and other pharma intermediates with innovative technologies like catalytic high pressure reactions. After the proposed expansion and setting up of new facility, its total installed capacity will be 3,650 tpa from existing 950 tpa. The company expects commercial production from the expanded capacity from October 2012.

The company expects capacity utilization to be 71% in FY 2011, 98% in FY 2012 and 61% in FY 2012.

The company is primarily involved in the production of specialty chemicals and pharma intermediates. It manufactures a range of organic, inorganic and organo inorganic intermediates. The inorganic intermediates include molybdenum derivatives, Selenium derivatives, iodine derivatives, cobalt derivatives, bismuth & tungsten derivatives and the organic intermediates include tartaric acid derivatives and other intermediates. These products find applications in various industries like pharmaceutical industry, chemical industry, glass industry, cosmetics, ceramic pigments and cattle & poultry feeds. Iodine & selenium derivatives are its key category of products contributing 88.23% to its gross sales during FY 2010.

The company is exporting its products to Europe, North America, Asia, South America & Australia.

The total exports constituted 8.69%, 12.35% and 7.97% of gross sales during FY 2008, FY 2009, and FY 2010, respectively.

At present its product portfolio comprises of more than 90 products in organic, inorganic and organo inorganic intermediates. With the proposed expansion, it will be able to expand its product lines in selenium, molybdenum, cobalt, and bismuth. Further, a new range of products in metal oxides such as cobalt oxide, molybdenum trioxide, and molybdenum disulfide will be added to its product portfolio after the proposed expansion of our manufacturing facilities.

With a view to strengthen our research and development, the company has taken 99.82% stake in Rishichem Research on May 14, 2010. It is engaged in manufacturing and R&D of specialty chemicals and pharmaceutical intermediates.

The company is coming with a IPO offering 81 lakh shares of Rs 10 each at a price band of Rs 95 to Rs 98 per share. The amount raised will be about Rs 77 to Rs 79.4 crore at the lower and upper band. Of this, Rs 32.16 crore will be used for setting up new manufacturing facility at Unit 4 at Badlapur, Maharashtra; Rs 14.62 crore for the expansion of existing manufacturing facilities at Unit 1, Unit 2 and Unit 3 at Badlapur, Maharashtra, and Rs 10 crore for meeting working capital requirements.

Strengths

The company has a diverse product range comprising a mix of organic, inorganic and organo inorganic intermediates comprising more than 90 products in these segments. The implementation of the proposed expansion will enable it to increase its product range further. The manufacturing infrastructure helps it change its product mix in response to changes in market demand.

Its OPM has continuously improved from 11.9% in FY 2006 to 19.8% for half year ended September 2010.

Weaknesses

Iodine and selenium derivatives alone contributed a major 88.23% of its gross sales for FY 2010. Decline in utility or development of some other alternatives could hurt the company significantly.

Valuation

At the lower price band of Rs 95 per equity share of Rs 10 face value, the P/E works out to 18.5 times the annualized EPS of Rs 5.1 (on post-IPO equity) for the half year ended September 2010. At the upper band of Rs 98, P/E works out to 19.1 times. There is no listed company in India with a similar product profile. However, the company can be broadly classified as Specialty Chemicals-Medium/Small company. This group is presently trading at a PE of around 8.5 on the basis of trailing 12 months.