My two cents on Rossari Biotech limited

Currently in the news:

“Rossari Biotech made a solid debut on Thursday, as the scrip got listed at Rs 670 on BSE, a premium of 57.65 per cent over its issue price of Rs 425.

About Rossari Biotech:

Rossari Biotech deals in specialty chemicals, on the onset the main characteristic of these chemicals is that they enjoy a huge margin laced with low volumes. It manufactures a whole range of products that find application in Home, Personal Care formulations, especially in the laundry and cleaning space. Being performance enhancers, they contribute significantly to the product experience and utility. The company focuses on its principle of providing environment friendly products that save energy and valuable natural resources.

Rossari Biotech operates in 10 segments which cumulatively constitute a market of USD 237 billion in 2018 globally and are expected to grow at 5.4% p.a. to reach USD 308 billion by 2023.

From the above image we can decipher that Rossari has untapped segments of 47% which it can harness with the capital inflow from the IPO or focus on an existing segment. But given the above distribution there can be no argument that growth potentials for Rossari are humongous.

Is the premium justified?

The initial public offering, sold in the price band of Rs 423-425 from July 13 to July 15, was subscribed over 79 times. At the issue price, the stock demanded a valuation that was 19.9 times FY20’s EV/Ebitda and 33.1 times earnings per share on a FY20 basis.

Rossari Biotech has been able to increase its total revenue from Fiscal 2017 to Fiscal 2019 at a compound annual growth rate of 41.07%, EBITDA at a compound annual growth rate of 79.87% and our profit after tax has increased at a compound annual growth rate of 77.83% over the same period. But these figures alone do not give an investor a concrete reason to invest in the IPO.

A business when broken down into segments, which are a component of a business that generate its own revenues and create its own product, product lines, or service offerings help us to put a pin on the company’s future path.

A close look at Rossari Biotech’s Segmental analysis:

Animal Health and nutrition segment: The primary additives considered in this segment include amino acids, vitamins/carotenoid, enzymes, organic acids and others. The company is consistent over the past three years and its investment has not portrayed any significant deviation.

Textile and specialty chemicals: Textile industry involves manufacturing practices which in turn involve use of varied chemicals to prepare, treat and color the fabrics. There has been a stark fall in the revenue percentage of this sector by almost 33%. Underlying connotation- The company is trying to dis invest its assets from this segment.

Home and Personal Care: The home care ingredients comprise ingredients which are used in manufacturing of home care products such as floor cleaners, detergents, toiletries, etc. that have applications in home and industries. The revenue has increased manifold to the tune of 157%. This is a landmark increase. An analysis of these figures reflected on the fact that in 2018, Rossari Biotech had entered into an exclusive purchasing agreement with HUL, and this speaks volume about the future of the company.

Now we know where Rossari Biotech intends to set its foot but for an investor their ulterior motive is value creation. So, does home and personal care segment have the growth potential?

To answer this question, I followed up on the peer companies of Rossari Biotech which has home and personal care as a significant segment, both in domestic and global geography.

On an average the competitors in the same segment are able to generate a whopping 17% margin compared to 11% margins in textile.

Inference of the segment math:

1. Rossari Biotech is the largest manufacturer of textile specialty chemicals in India but is skeptical to its cyclical nature and is sensitive to general economic conditions and factors such as consumer demand, consumer confidence, inflation, employment, disposable income levels and demographic trends. Further, according to the F&S Report, 75.5 % of the textile market in India is the unorganized segment, which tends to be highly price sensitive. This justifies its reduced investment in Textile segment.

2. The home care and cleaning products market has been growing rapidly due to dynamic factors like a growing population, the rising awareness of health and hygiene concerns and increasing income levels, particularly in developing countries. These factors have triggered the sales of cleaning products to grow at double-digit figures in certain countries in the last few years. As a result, sales of ingredients used in these products have also witnessed a strong performance in the past couple of years. Also, this sector is expected to grow at CAGR of 10.8%.

3. Emerging opportunities in exports led by clamp down in China and simultaneous outsourcing opportunity from Western countries are expected to spur growth in exports and import substitution.

Valuation comes with its own grey area which differs from an analyst to analyst. According to me the above factors call for a premium in the value and the market sentiments are justified.