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SPA Securities has come out with a research report on Chemcel Biotech's IPO. It has recommended investors to ignore the issue.

Chemcel Biotech has opened for subscription with its initial public offering (IPO) of 1,54,00,000 equity shares of Rs 10 each. The issue will close on September 12, 2008. The issue price is Rs 16.

Foray into bio-diesel industry: The current business of the company is cyclical in nature & the management feels that the growth in the next few years in the agrochemical business will be ~3-5% only. Also to mitigate the impact of the cyclical nature of the business, CBL intends to foray into bio-diesel industry which has good growth potential going forward. AP is the largest pesticide market: Andhra Pradesh is the largest pesticide market in India. CBL has a strong network of 18 distributors, 350 direct dealers & 550 retailers.

Revenues from bio-diesel will come in FY 11: Though the sale of bio-diesel will start by Sept’09, but the total revenue contribution will be seen in FY11. Seasonality of the business: CBL currently records 70% of their revenues during Oct-Mar. Low capacity utilization: CBL’s capacity utilization stood at 30% for FY08. This is quite low given the fact that they have been in the industry for over a decade. CBL believes that post the IPO when once the working capital requirement is met; this shall go up to 70-75%.

The stock is available at a P/E of 34x on its FY08 EPS of Re.0.47. Even on the EPS of FY11E, the stock is priced at a P/E of 12x. This appears to be very expensive in comparison to the peer group which is available at a P/E range of 4-7x based on FY08 EPS. The low capacity utilization is mainly due to high working capital required by the company and CBL being a small company is looking for funds in order to enhance their capacity utilization. The growth rate in the agrochemical business is expected to be low. The expensive valuation makes the issue less attractive for investment even though the fact that CBL is planning for diversification in the business in order to maintain its growth rate. Hence, we recommend to ignore the issue.

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