Chemicals

India I Equities
IPO Note

22 April 2019

Neogen Chemicals IPO Issue Price: `212-215

Leader in bromine chemistry; OFS and fresh issue; Subscribe Subscribe

The leading manufacturer of bromine specialty chemicals in India: Key data

Commencing operations in 1991, at Mahape, Navi Mumbai, with a few IPO issue date 24th – 26th April’19
bromine-based compounds and lithium salts, now Neogen has became one of
Face value `10
India’s leading manufacturers of bromine and lithium-based derivatives. Over
the years, it has broadened the number of its products 198, comprising 181 Lot size 65 shares
organic and 17 inorganic chemicals. Issue price `212-215

Capacity expansion, focus on advanced specialty intermediates: The IPO issue size-OFS `624m

company has installed capacity for 130,400 litres of organic chemicals and No. of shares-OFS 2.9 m
1,200 tons of inorganic chemicals,with utilisation at respectively 64% and Fresh issue size `700m
94%. It plans to double capacity to ~256,000 liters and 2,400 tons of organic No. of shares – Fresh issue 3.2 m
and inorganic chemicals to cater to mounting demand. It is trying to forward-
QIB Up to 50%
integrate bromination with other chemistries to make advanced intermediates,
otherwise being manufactured by customers in-house. Retail 35%
Non-institutional 15%
[Link] FY14-18, it reported revenue, EBITDA and PAT CAGRs
of respectively ~22%, 26% and 30%. Its EBITDA margin expanded 244bps
to 18%. Debt-based capex funding led to its net-debt-to-equity touching 1.9x Shareholding pattern (%) Pre-IPO Post-IPO
in FY18,up from 1.2x in FY15. Its RoE and RoCE have averaged ~20% and
Promoter 95.8 70
~15% respectively over FY14-18. Its cash-conversion cycle wasa lengthy 145
days in FY18 due to business requirements of maintaining higher inventory Non-promoter group 4.2 30
for operational benefits. Total 100 100

[Link] the higher end of the issue price of `215 a share, the stock is
valued at ~20.1x FY18EV/EBITDA and ~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 `7, the stock 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:Slow growth in underline sectors
such as pharma, high working capital intensity and high debt great
dependence on certain customers.
Key financials (YE Mar) FY14 FY15 FY16 FY17 FY18
Sales (` m) 738 839 1,003 1,101 1,612
Net profit (`m) 36 51 52 77 105
EPS (`) 1.6 2.2 2.2 3.3 4.5
PE (x) 137.7 98.7 96.9 65.3 47.8
EV / EBITDA (x) 45.8 41.4 37.3 28.4 20.1 Nav Bhardwaj
PBV (x) 25.6 21.4 18.2 12.0 10.0 Research Analyst
RoE (%) 18.6 21.6 18.8 18.3 21.0
RoCE (%) 13.7 16.6 15.3 14.8 13.4
Dividend yield (%) 0.9 0.9 0.9 0.5 0.5 Bhawana Israni
Net debt / equity (x) 1.2 0.9 0.9 1.6 1.6 Research Associate

Source: Company, Anand Rathi Research

Anand Rathi Share and Stock Brokers Limited (hereinafter “ARSSBL”) is a full-service brokerage and equities-research firm and the views expressed therein are solely of
ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient. Disclosures and analyst
certifications are present in the Appendix.

Anand Rathi Research India Equities

22 April 2019 Neogen Chemicals IPO – Leader in bromine chemistry; OFS and fresh issue; Subscribe

Quick Glance – Financials and Valuations

Fig 1 – Income statement (`m) Fig 2 – Balance sheet (` m)
Year-end: Mar FY14 FY15 FY16 FY17 FY18 Year-end: Mar FY14 FY15 FY16 FY17 FY18

Net revenues 738 839 1,003 1,101 1,612 Share capital 45 45 200 200 200
Growth (%) - 13.7 19.5 9.7 46.4 Net worth 196 235 275 420 501
Direct costs 448 497 611 640 948 Debt 257 242 264 690 822
SG&A 175 215 251 260 373 Minority interest - - - - -
EBITDA 115 127 141 200 290 DTL/(Assets) 17 20 21 37 40
EBITDA margins (%) 15.5 15.1 14.1 18.2 18.0 Capital employed 470 497 561 1,147 1,363
- Depreciation 9 9 10 13 19 Net tangible assets 136 132 174 563 666
Other income 4 10 2 3 7 Net intangible assets 0 0 0 0 1
Interest expenses 48 47 48 75 104 Goodwill - - - - -
PBT 62 81 85 115 173 CWIP (tang. &intang.) 0 1 7 13 14
Effective tax rate (%) 41.1 37.0 38.9 33.3 39.5 Investments (strategic) - - - 5 4
+ Associates / (minorities) - - - 0 0 Investments (financial) - - - - -
Net income 36 51 52 77 105 Current assets (ex cash) 475 530 599 912 1,097
Adjusted income 36 51 52 77 105 Cash 18 24 25 31 18
WANS 23 23 23 23 23 Current liabilities 160 190 243 377 437
FDEPS (`/ sh) 1.6 2.2 2.2 3.3 4.5 Working capital 315 340 356 535 660
FDEPS growth (%) 39.6 1.9 48.3 36.6 Capital deployed 470 497 561 1,147 1,363
Gross margins (%) 39.3 40.7 39.1 41.8 41.2 Contingent liabilities 108 103 56 38 45

Fig 3 – Cash-flow statement (`m) Fig 4 – Ratio analysis

Year-end: Mar FY15 FY16 FY17 FY18 Year-end: Mar FY14 FY15 FY16 FY17 FY18

PBT 81 85 115 173 P/E (x) 137.7 98.7 96.9 65.3 47.8
+ Non-cash items 9 10 13 19 EV / EBITDA (x) 45.8 41.4 37.3 28.4 20.1
Oper. prof. before WC 90 95 128 192 EV / Sales (x) 7.1 6.2 5.2 5.2 3.6
- Incr./(decr.) in WC 25 16 180 125 P/B (x) 25.6 21.4 18.2 12.0 10.0
Others incl. taxes 26 31 39 65 RoE (%) 18.6 21.6 18.8 18.3 21.0
Operating cash-flow 39 48 -91 3 RoCE (%) - after tax 13.7 16.6 15.3 14.8 13.4
- Capex (tang. +intang.) 6 58 408 124 RoIC 14.3 17.3 16.1 15.3 13.6
Free cash-flow 34 -10 -499 -121 DPS (` / sh) 2.0 2.0 2.0 1.0 1.0
Acquisitions Dividend yield (%) 0.9 0.9 0.9 0.5 0.5
- Div. (incl. buyback& taxes) - - - - Dividend payout (%) - incl. DDT 24.7 17.7 77.2 26.0 19.1
+ Equity raised - 155 - - Net debt / Equity (x) 1.2 0.9 0.9 1.6 1.6
+ Debt raised -15 22 426 132 Receivables (days) 82 78 58 107 94
- Fin investments - - 5 -1 Inventory (days) 173 178 190 228 192
- Misc. (CFI + CFF) 12 167 -84 23 Payables (days) 117 120 130 177 141
Net cash-flow 6 1 6 -13 CFO:PAT% - 77.4 92.0 -118.2 2.8

Source: Company, AnandRathi Research Source: Company, AnandRathi Research

Anand Rathi Research 2

22 April 2019 Neogen Chemicals IPO – Leader in bromine chemistry; OFS and fresh issue; Subscribe

Salient features of the issue

 The offer: `1,324m, consisting of
 An offer for sale: 2.9m equity shares of `10 [Link]: `624m.
 A fresh issue: 3.2m equity share of `10 each. Size: `700m.
 Listing on the BSE and the NSE.
 Issue size: `1,314.80m–1,323.50m.
 Price band: `212–215.
 Bid lot: 65 shares and multiples thereof.
 Post-issue implied market cap:`4,947m–5,017m.
 BRLMs: Inga Advisors, Batlivala & Karani Securities.
 Registrar: Link in Time India Pvt. Ltd.
 Issue opens 24thApr’19; closes 26th Apr’19.

Fig 5 – Indicative timetable

Activity Approximate Date
Finalisation of Basis of Allotment 03-05-2019
Refunds/Unblocking ASBA Fund 06-05-2019
Credit of equity shares to DP A/c 07-05-2019
Trading commences 08-05-2019
Source: Company

Fig 6 – Issue break-up

Category (` m) % of the issue
QIB* 657.4—661.8 50
NIB 197.2—198.5 15
Retail 460.2—463.2 35
Total 1314.8—1323.5 100
* Company may allocate up to 60% shares of the QIB portion to anchor investors
Source: Company

Fig 7 – Shareholding (%)

Pre-issue Post-issue
Promoters &Promoter’s Group 95.8 70.0
Public 4.2 30.0
Total 100.0 100.0
Source: Company

Fig 8 – Objective of the Issue

(` m)
Pre-payment or repayment of all, or a portion of, certain borrowings 205
Early redemption of 9.8% FRCPS 115
Long-term working capital 200
General corporate purposes 180
Source: Company

Anand Rathi Research 3

22 April 2019 Neogen Chemicals IPO – Leader in bromine chemistry; OFS and fresh issue; Subscribe

Leading manufacturers of bromine

specialty chemicals in India
Commencing operations in 1991 at Mahape, Navi Mumbai, with a few
bromine-based compounds and lithium salts, now Neogen has became one
of India’s leading manufacturers of bromine and lithium-based derivatives.
Its products are used in pharmaceutical and agrochemical intermediates,
engineering fluids, electronic chemicals, polymer additives, water-
treatment, construction and aroma chemicals, flavours and fragrances,
specialty polymers, chemicals and VAM original-equipment manufacturers.

Fig 9 – Sale of products across industry segments

100%
8% 11% 6%
12%
90% 11%
20% 10%
80% 17% 5%
70% 14%

60% 20% 18%

50%
40% 79%
30% 65%
52% 52%
20%
10%
0%
FY16

FY17

FY18

Sep,18
Pharmaceutical Engineering Agrochemical Others

Source: Company

Products
Organic chemicals (molecules containing carbon): 131 bromine
compounds + 25 organic specialty-chemical compounds.
 Bromine compounds and/or other organic compounds containing
chlorine, fluorine and iodine, and combinations of them.
 Niche products such as 25 types of Grignard reagents.
Inorganic (non-carbon-containing molecules): 10 lithium compounds.
 Lithium compounds manufactured by Neogen used in vapour
absorption machines (VAM) for cooling air/water/process equipment.
 Use in industries such as heating ventilation and air-conditioning
(HVAC) and refrigeration, construction chemicals, pharmaceuticals
and specialty polymers.

Anand Rathi Research 4

22 April 2019 Neogen Chemicals IPO – Leader in bromine chemistry; OFS and fresh issue; Subscribe

Fig 10 – Products segment

Neogen Chemicals

Organic chemicals Inorganic chemicals

188 products bringing 70% to 10 products bringing 30% to
sales sales
()

Bromine compounds Non-bromine specialty Grignard reagents Lithium compounds

(131 products) chemical compounds (25 products) (10 products)
(32 products)
Used in pharmaceutical, Added non-bromine Used as intermediates in Used primarily as
agrochemical, aroma specialty chemical the synthesis of active refrigeration agents for
electronic industries as compounds: chlorine, ingredients of VAMs, and sold to VAM
intermediates iodine and fluorine- pharmaceuticals, agro original-equipment
based compounds. chemicals and flavouring manufacturers in India
Similar use as bromine industries
compounds

Source: Company

Custom synthesis and Contract manufacturing (CSCM)

 The company undertakes custom synthesizing and contract
manufacturing (CSCM) of a few specialty chemicals for multinational
companies based in Europe, Israel, China and Japan. FY16, FY17,
FY18 and 9MFY19 income from CSCM was respectively `1.2m,
`24.2m, `38.9m and `150.6m.

 It has entered into contract-manufacturing arrangements with a few

international companies engaged in pharmaceuticals, agrochemicals,
aromas and specialty polymer industries. Under some of these
arrangements, it has already delivered products.

Fig 11 – Segment-wise revenue break-up

(%)
100
90 21.0
27.4
80 35.2
42.7
70
60
50
40 79.0
72.6
30 64.8
57.3
20
10
0
FY16

FY17

FY18

9MFY19

Organic Chemicals Inorganic Chemicals

Source: Company

Strong client base

Over the last 25 years, it has established a customer base of ~1,363, of
which ~1,237 are domestic and ~126 international.
Itmarkets its products in India and abroad(50% each), in particular to the
USA, Europe and Japan (incl. 16% deemed exports where the company
supplies its products to customers who will eventually export the end-
product).

Anand Rathi Research 5

22 April 2019 Neogen Chemicals IPO – Leader in bromine chemistry; OFS and fresh issue; Subscribe

Fig 12 – Strong customer base

Established Customer Reach

(1,363 customers)

Domestic Exports
Contribution to revenue 62% Contribution to revenue 38%
(1,237 customers) (126 customers)
Customers across the country Sold products to 27
equallyspread across northern, countries:the USA, Mexico,
southern and western India Canada, Japan, the UK,
France, Germany, Spain, Italy,
Sweden, the Czech Republic,
S. Korea, the UAE, Saudi
Arabia, Israel, Egypt, Taiwan,
Australia, China

Source: Company

Major raw materials

The primary raw materials used in the manufacturing process of organic
and inorganic specialty chemicals are:
 Bromine source
 Lithium source
 Organic raw materials
 Inorganic acids.
The prices of raw materials procured in India are lower than those of
China.
Employees
On 28thFeb’19, Neogen employed
 152 full-time,
 45 fixed-term contract employees (generally five-year contracts)
 Four retainers.
Research and Development
 Two R&D facilities, at
o Vadodara and
o Mahape
 A dedicated 20-member R&D team (10% of its workforce).
 Key contribution from the R&D team: From Dec’01, the number of
its products has grown from around 20 to 198 at present (excl.
CSCM).

Anand Rathi Research 6

22 April 2019 Neogen Chemicals IPO – Leader in bromine chemistry; OFS and fresh issue; Subscribe

Competitive strengths
Fig 13 – Strong customer base

 2 R&D centres at each manufacturing facility

 Two promoters, cumulative experience
of more than six decades
 Helps in new product development Continuous
investment in R&D Experienced  Both are chemical engineers and
 Toxic nature of raw materials, quality, + promoters with alumni of The Indian Institute of
technical skills and expertise are key Specialised business domain knowledge Technology, Bombay
entry barriers model with high entry +
barriers Managment Expertise

Diversified and Large and diverse array  Started operations in 1991

 Diversified product range enables stable customer of products manufacturing four products:
to cater to diverse customers across
base lithium bromide, n-propyl bromide,
a wide array of user industries such as
potassium bromide, meta-phenoxy
benzaldehyde
 Pharmaceutical,agrochemicals,
aroma, electronic and construction chemicals
 Currently, manufactures 198products

Source: Company

Large and diverse array of products

Neogen started operations in 1991 manufacturing four products: lithium
bromide, n-propyl bromide, potassium bromide and meta-phenoxy
benzaldehyde. Over the years, it widened its product range. By31Dec’18, it
had manufactured 198products.

Fig 14 – Expanding product portfolio

(Nos.)
200 189
180
156
160
140
120
100 95

80
57
60
40
20
20 12
4
0
1991

1996

2001

2006

2011

2016

2018

Source: Company

Diversified and stable customer base

The company has a diversified product range, which helps it cater to
diverse customers across a wide array of user industries such as
pharmaceuticals, agrochemicals, aroma, electronic and construction
chemicals, specialty polymers and VAM original-equipment manufacturers.
This helps mitigate risks from customers, industry and geographic
concentration.

Anand Rathi Research 7

22 April 2019 Neogen Chemicals IPO – Leader in bromine chemistry; OFS and fresh issue; Subscribe

Growth driven by continuous investment in R&D

The company has made regular investments in R&D to expand its product
range and streamline its manufacturing [Link] has two R&D facilities,
one each in Vadodara and Mahape, with a dedicated 16-member team,
constituting ~9% of its workforce. The team comprises five senior
personnel (including one retainer) with doctorates in science from reputed
institutions. Chairman and MD Haridas Thakarshi Kanani leads the R&D
initiatives.
Further, since the commencement of the dedicated R&D department, in
Dec’01, the number of its products has grown from around 20 to 198 at
present (excl. those developed under contract manufacturing).
Per management, product and process innovations will be key factors
ahead and continuing investment in R&D will benefit fromcoming
opportunities.
Specialised business model with high entry barriers
The bromine-specialty-chemicals industry is highly knowledge-intensive.
The end use of products is to manufacture high-value proprietary and
specialised products. This requires that each process and product is
measured against exacting quality standards and stringent impurity
specifications.
Further, product use has been formally recognised in filings with
Regulatory agencies. Any change in the vendor of a product may require
significant time and cost to a customer. These factors are significant entry
barriers.
Over the years, the company has built strong relations of more than a
decade with customers who recognise technical capabilities and timely
deliveries and associate the brand with good and consistent quality.
Moreover, some of the chemicals used such as bromine and lithium are
highly corrosive and toxic. Therefore, handling them requires a high degree
of technical skill and expertise. Operations involving such hazardous
chemicals ought to be undertaken only by qualified and proficient
personnel.
Per management, the level of technical skill and expertise essential to
handle such chemicals can only be achieved over time, creating as further
barrier to new entrants.
Established, stable relations with suppliers
The company’s consistent track record of business growth over the years
and repeated business from customers have enabled it to develop long-
standing relations with suppliers. It has relations of over a decade with
large producers of bromine and lithium.
The company has annual contracts, offering stable pricing to customers.
Further, due to large volume of the annual contracts, it is able to negotiate
attractive pricing compared to local competitors. This gives it an edge.

Anand Rathi Research 8

22 April 2019 Neogen Chemicals IPO – Leader in bromine chemistry; OFS and fresh issue; Subscribe

Growth triggers
Capacity expansion, focus on advanced specialty intermediates
With installed capacity of 130,400 litres of organic chemicals and 1,200
tons of inorganic chemicals and utilisation at respectively 64% and 94%,
the company plans to double capacity to ~256,000 litres and 2,400 tonnes
of organic and inorganic chemicals to cater to growing demand in the
industry. It is trying to forward integrate bromination with other
chemistries to make advanced intermediates, otherwise being
manufactured by customers in-house.

Fig 15 – Existing and forthcoming expansions

Manufacturing Facilities

Current Proposed
Capacities Expansion

Organic Inorganic Organic Inorganic

(130,400 ltrs) (1,200,000 kg)

Mahape, Mahape, Vadodara, Dahej, Gujarat

Maharashtra Maharashtra Gujarat (Greenfield
(78% utilization) (90% utilization) Project)
45,000 ltrs 1,200,000 kg 126,000 ltrs 1,200,000 kg

Vadodara,
Gujarat
(53% utilization)
85,400 ltrs.

Source: Company

Augmenting growth in domestic and global markets

Its domestic and export businesses contribute almost 50% each (including
16% deemed exports, where the company supplies products to those who
eventually export end-products).
The company believes that demand for bromine-based and lithium-based
products will grow in India and overseas owing to growth in industries
where theyare finally utilised (pharma, agrochemicals, refrigeration,
polymer syntheses, flavour and fragrances, etc.).
It is poised to exploit opportunities thrown up by the expected growth in
the industries which finally use the chemicals due to
 Strong manufacturing capabilities
 Established customer relations
 Strong R&D capabilities
 Robust product range.
Specialty chemicals manufacturedin China comprised a significant
proportion of the specialty chemicals global market. The decline in China
due to environmental concerns regarding manufacturing specialty
chemicals, will leaves the field open to the company regarding its future
growth.

Anand Rathi Research 9

22 April 2019 Neogen Chemicals IPO – Leader in bromine chemistry; OFS and fresh issue; Subscribe

About the management

Experienced promoters with domain knowledge
Promoters Haridas Thakarshi Kanani and Harin Haridas Kanani have
cumulative experience of more than six decades. Before setting up Neogen
in 1989, the former was a consultant to many chemical manufacturing
companies in India. The latter was with Asian Paints. He also worked with
a research company, Pioneer Hi-Bred International,a DuPont Company,
USA.

Fig 16 – About the management

Haridas Kanani A chemical engineering from IIT- [Link] oversees the manufacturing,
Chairman & MD R&D and general operation along with general management of Company’s
manufacturing units.

A chemical engineer from IIT- Bombay and a master’s degree and a

Harin Haridas Kanani doctorate in chemical engineering from the University of Maryland. He
Joint Managing Director heads various divisions ofCompany including R&D, business development,
quality control, purchase, marketing and finance.

Sanjay Natwarlal Mehta Practicing CA with 42 years’ experience;expertise in corporate audit and
Independent Director taxation, regulatory compliances, international taxation and corporate law

Hitesh B. Reshamwala Chartered Accountant with 29 years’ expertise in tax and statutory
Independent Director compliances

Ranjan Kumar Malik Gold medalist in engineering and technology from Kanpur
Independent Direct University;Master’s, chemical engineering from IIT, Kanpur; PhD from the
University of Wisconsin-Madison, USA

Avi Kersi Sabavala [Link].(Hons.) from Delhi University; LLB from Maharaja Sayajirao University,
Independent Director Baroda, M.A. (Social Work) from Delhi University and Diploma in Management
from The Indira Gandhi National Open University

Anurag Surana [Link] (Hons.) from the University of Delhi; was previously executive
Non-Executive Director director on the Board of PI Industries for 14 years

Shyamsunder Upadhyay [Link]. from Vikram University, Ujjain. 41 years’ experience in chemicals.
Executive Director
Oversees maintenance, logistics, administration and the engineering store

Source: Company

Anand Rathi Research 10

22 April 2019 Neogen Chemicals IPO – Leader in bromine chemistry; OFS and fresh issue; Subscribe

SWOT analysis
Strengths
 The company’s consistent track record of business growth over the
years and repeated business from existing customers have enabled it to
develop long-standing relations with suppliers.
 It has relations of over a decade with large producers of bromine and
lithium.
 It has annual contracts, which offer stable pricing to customers.
 Further, its large volume of annual contracts gives it the ability to
negotiate attractive pricing compared to local competitors. This gives
it an edge.
Weakness
 Significant dependence on few suppliers.
 Explosive growth proportion of use by end-consumers cannot be
envisaged.
Opportunity
 With greater capacitiesin organic and inorganic chemicals will help to
cater the growing demand in the industry.
Threats
 Risk to pass on the rise in the raw material prices
 Volatility in forex rates
 Working capital intensive business
 Any environmental issues.

Anand Rathi Research 11

22 April 2019 Neogen Chemicals IPO – Leader in bromine chemistry; OFS and fresh issue; Subscribe

Financials
Over FY15-18, the company reported revenue, EBITDA and PAT
CAGRs of respectively ~22%, 26% and 30%. Its EBITDA margin
expanded 244bps over FY14-18 to 18%. Capex funding pushed up its net-
debt-to-equity to 1.6x in FY18, from 1.2x in FY15. In FY18 its RoE was
21%; its RoCE 13.4%. Higher inventory days lengthened its cash-
conversion cycle to average 140 days over FY14-18; 159 days in Dec’18.

Fig 17 – Revenue registered a 21.6% CAGR over FY14-18 Fig 18 – EBITDA margin expanded 244bps over FY14-18
(` m) (%) (` m) (%)
1,800 50.0 300 19.0
46.4
1,600 45.0 18.2 18.0
250 18.0
1,400 40.0
1,200 35.0 200 17.0

1,000 30.0
150 15.5 16.0
800 25.0
15.1
19.5 100 15.0
600 20.0
400 13.7 15.0 14.1
9.7 50 14.0
200 10.0
738 839 1,003 1,101 1,612 115 127 141 200 290
0 5.0 0 13.0

FY14

FY15

FY16

FY17

FY18
FY14

FY15

FY16

FY17

FY18

Revenue Growth (RHS) EBITDA Margin (RHS)

Source: Company Source: Company

Fig 19 – PAT clocked a 30% CAGR over FY14-18 Fig 20 – Net D/E touched 1.6x due to capex
(` m) (%) (` m) (%)
120 60.0 450 426 1.8
408
400 1.6
100 48.3 50.0 1.6
105 350 1.6
1.4
39.6 300
80 36.6 40.0 1.2
77 250
1.0
60 30.0 200
0.9 0.8
0.9
52
150 124 132
51 0.6
40 20.0 100
36 58
50 0.4
22
20 10.0 6
0 0.2
1.9
-50 (15) 0.0
0 0.0
FY15

FY16

FY17

FY18
FY14

FY15

FY16

FY17

FY18

PAT Growth (RHS) Capex Increase in debt Net D/E (RHS)

Source: Company Source: Company

Fig 21 – Healthy return ratios Fig 22 – Lengthy working-capital cycle

(%) (Days)
22 21.6 250
21.0

20
18.6 18.8 200
18.3
18
150
158

145

16 16.6
138

136

15.3
117

14 14.8 100
177
117

120

130

141

13.7
13.4
12
50
173

190
178

228

192

10
107
82

78

58

94
FY14

FY15

FY16

FY17

FY18

0
FY14 FY15 FY16 FY17 FY18
ROE ROCE Receivables Inventory Payables Cash conversion cycle
Source: Company Source: Company

Anand Rathi Research 12

22 April 2019 Neogen Chemicals IPO – Leader in bromine chemistry; OFS and fresh issue; Subscribe

Reasons for high working-capital

Inventory days
The company manufactures many products. Customers’specifications are
different, with different impurity profiles. Consequently, production time
from a given reactor to makeone tonne of a product can range from five to
30 days. To support such requirements, the company has, in the past,
maintained ~120-145 days of work-in-progress on the cost-of-goods sold.
Receivable days
The company had 83 and 94 days of receivables in respectively FY18 and
FY17. With the expected increase in letter-of-credit-backed domestic sales
and exports, the company expects receivables to improve to 75 days in
FY19.
Payable Days
The company had had 163 and 131 days for payables in respectively FY17
and FY18 due to maintaining buyer’s credit for import purchases. In the
absence of buyer’s credit, it expects the payables cycle to contract to 75
days.
Peer comparison

Fig 23 – Peer valuation

M. Cap EV/EBITDA P/E
(` m)
(` bn) FY17 FY18 FY19e FY20e FY17 FY18 FY19e FY20e
Aarti Inds. 115.7 22.6 21.8 15.8 14.3 42.3 39.7 30.9 27.7
Atul 101.6 20.9 20.7 16.1 13.5 32.6 38.1 27.7 23.8
Navin Fluorine* 35.0 20.6 14.5 13.4 11.1 25.4 21.1 21.5 19.0
Vinati Organics* 90.5 41.4 42.4 24.4 18.1 64.8 62.9 34.7 26.9
Source: Company, Anand Rathi Research, *Bloomberg Consensus

Fig 24 – Financials of peers

Gross EBITDA
CAGR % (FY14-18) margins (%) margins (%) RoCE(%) RoE(%) Cash-conversion cycle (days)
Company Revenue EBITDA PAT FY18 FY18 FY16 FY17 FY18 FY16 FY17 FY18 FY16 FY17 FY18
Aarti Inds. 9.7 14.9 19.7 42.7 18.4 14.2 14.6 12.8 22.6 23.2 21.1 101.4 115.8 120.2
Atul 7.6 8.6 6.0 45.3 15.3 15.4 15.9 12.3 17.0 16.4 12.3 91.8 86.4 69.5
Navin Fluorine 17.0 34.3 26.0 55.9 23.6 11.5 16.4 19.2 11.4 16.4 16.9 76.1 106.8 76.3
Vinati Organics 1.7 8.4 13.7 49.2 28.4 23.4 20.4 17.6 24.2 20.6 18.1 92.3 119.3 105.1
Neogen 21.6 26.1 30.3 41.2 18.0 15.3 14.8 13.4 18.8 18.3 21.0 117.0 158.1 145.0
Source: Company, Anand Rathi Research

Anand Rathi Research 13

Appendix
Analyst Certification
The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the
compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research
analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange
Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have
no bearing whatsoever on any recommendation that they have given in the Research Report.

Anand Rathi Ratings Definitions

Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described
in the Ratings Table below:
Ratings Guide (12 months)
Buy Hold Sell
Large Caps (>US$1bn) >15% 5-15% <5%
Mid/Small Caps (<US$1bn) >25% 5-25% <5%

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