Neogen Chemicals Limited. - IPO Note

Private Client Research






Neogen Chemicals Limited.


April 22, 2019

Rating: Avoid

Sensex: 38720.24

CNX Nifty: 11631.05



Price range
Issue Period
24th April 2019 to 26th April 2019


April 22, 2019



CNX Nifty







Issue details

Face value (Rs.)
Market lot
65 equity shares and in multiples thereof
Issue size
Rs. 131.48- Rs. 132.35 crores
Public Issue
6,155,814 (Fresh issue of 3,255,814 equity shares + offer for sale of 2,900,000 equity shares)
Market cap post IPO
Equity Pre - IPO
Rs. 20.08 crores
Equity Post - IPO
Rs. 23.34 crores
Issue type
Offer for Sale and Fresh Issue

Shareholding (Pre IPO)


Shareholding (Post IPO)


+91 22 6639 3000

Market Leader:
Neogen Chemicals is the market leader in Bromine chemistry and manufactures organic chemical compounds – Bromine compounds and other organic compounds containing chlorine, fluorine and iodine-based and combination – used in application industries such as pharmaceutical, agrochemical, flavour and fragrance and electronic chemicals.

Besides, it makes inorganic chemicals primarily comprising Lithium compounds. These compounds are used in vapour absorption machines (VAM) and in heating ventilation and air-conditioning (HVAC) and refrigeration, construction chemicals, pharmaceutical and specialty polymer. Organic chemicals account for 60-70 per cent of the company’s revenues while the rest comes in from inorganic chemicals.

In addition to manufacturing its standard products, the company also undertake custom synthesis and contract manufacturing. In custom synthesis the product is developed and customized primarily for a specific customer, but process know-how and technical specifications are developed in-house. Further, the company has, more recently, also commenced contract manufacturing where, the product is developed under confidentiality for a single customer using the process know-how and the technical specifications provided by the customer. Contract manufacturing has enabled us to increase bouquet of product offering.

Large variety of products:
Neogen started operations in 1991 manufacturing 4 products viz., lithium bromide, n-propyl bromide, potassium bromide and meta-phenoxy benzaldehyde. As of September 30, 2018, the company have manufactured an aggregate of 187 Products comprising 170 organic chemicals and 17 inorganic chemicals. Of these, our Product bouquet comprises:

  • 125 Bromine Compounds;
  • 10 Lithium Compounds;
  • 28 non-bromine specialty chemical compounds comprising 21 organic specialty chemical compounds;
  • 24 types of Grignard reagents.
Neogen Chemicals Ltd

Specialized business model with high entry barrier:
The specialty chemicals industry is highly knowledge intensive. Products are used for specialty applications in the pharmaceutical, agrochemical, aroma chemical, construction chemical, specialty polymer and electronic-chemical industries where they are used to manufacture high value proprietary and specialized products. Given the nature of the application of products, the processes and products are subject to, and measured against, exacting quality standards and stringent impurity specifications. Further, where these products are used has been formally recognized in filings with regulatory agencies, any change in the vendor of the product may require significant time and cost for the customer. These factors create significant entry barriers.

Moreover, some of the chemicals that the company use such as bromine, fluorine and lithium are highly corrosive and toxic chemicals. Therefore, handling these chemicals requires a high degree of technical skill and expertise, and operations involving such hazardous chemicals ought to be undertaken only by personnel who are qualified and proficient. We believe that the level of technical skill and expertise that is essential for handling such chemicals can only be achieved over a period creating further barrier for new entrants.

Established and stable relationship with suppliers:
Consistent track record of business growth over the years and repeated business from existing customers has enabled Neogen to develop long standing relationship with its suppliers. The company have relationship of over a decade with large producers of Bromine Source and Lithium Source. Based on its relationships with its suppliers the company can enter into annual contracts thereby offering stability in pricing to its customers. Also, during times of shortages, they are ensured of continuous supplies at competitive rates and hence productivity and commitment to customers is not affected even under such difficult situations.

Further, due to large volume of annual contracts the company is also able to negotiate attractive pricing as compared to our local competitors which gives them a competitive advantage.

Expanding production capacities:
The company over the years have increased its production capacities through organic and inorganic growth. Set out below is a table depicting the growth of our capacity for the production of organic chemicals at Mahape Facility.

Further, in Fiscal 2016, the company acquired the Vadodara Facility for augmenting our organic chemicals manufacturing capability. Presently, it proposes to further increase manufacturing capacity at Vadodara facility by an additional 126,000 litres (reactor volume in litres) which will nearly double organic chemicals manufacturing capacity from 130,400 litres to 256,400 litres.

Further, Vadodara Facility is spread over approximately 39 acres and on completion of the Proposed Vadodara Facility it will still have over 32 acres of freehold land which we can use for further growth and expansion.

In addition, the company also propose to set up the Proposed Dahej Facility, a green-field manufacturing facility for manufacturing inorganic chemical products. When completed the Proposed Dahej Facility will increase inorganic chemicals manufacturing capacity by 1,200,000 kg per annum, which will double total inorganic specialty chemical manufacturing capacity. The Proposed Dahej Facility is expected to cater to the anticipated increase in demand for lithium compounds.

We believe that the Proposed Vadodara Facility and the Proposed Dahej facility will enable significantly increase product offering and will also benefit from the economies of scale.

Increasing contract manufacturing portfolio:
Contract manufacturing business will enable the company to enter into long term contracts with assured margins and product off-take which will helps them to strengthen repeat business year on year. At present, the company has entered into contract manufacturing arrangements with a few international companies, who are engaged in the pharmaceutical, agrochemical, aroma and specialty polymer industries and Neogen has already delivered products under some of these arrangements.

Neogen aims to increase the size and scale of contract manufacturing business over the next few years. The company is in discussions with various companies in Europe and Japan to develop their proprietary products for which have already executed nondisclosure and secrecy agreements. Further, they also propose to increase focus on custom synthesis business by augmenting the share of their business with innovator companies.

Focus on advanced specialty intermediates which offer higher value addition:
Over the last few years Neogen has been focusing not only on manufacturing Bromine Compounds but also combining bromination with other chemistries to make advance intermediates which otherwise would have been manufactured by its customers internally. Such forward integration allows customers to reduce processing at their end freeing up their specialized capacity for making final molecules such as APIs, specialty polymers, electronic chemicals etc. Such forward integration enables the company to offer higher value addition and generate higher margin and increased profitability. We believe that with proposed augmentation in capacity would be able to cater to the increasing demand for such advanced intermediates.



Growth of specialty chemicals is contingent upon growth in major end-user industries. Paints and coatings demand will be driven by growth in the Indian automotive sector, which has risen sharply in the recent past. Also, sharp rise in demand for water has put pressure on supply of water for irrigation, drinking and industrial usage. The need to augment and maintain adequate supply of water necessitates greater amount of recycling, resulting in higher demand for water chemicals. Water treatment chemicals are used for a wide range of industrial and in-process applications such as reducing effluent toxicity, controlling biological oxygen demand and chemical oxygen demand and disinfecting water for potable purpose. Water chemicals are used across diverse industries, ranging from large power plants, refineries and fertilizer factories to pharmaceuticals, food and beverages, electronic and automobile companies.

Exports of organic chemicals from India have grown by a CAGR of ~6.9% during the period Fiscal 2014 to Fiscal 2018 in value terms. Exports of organic chemicals grew from Rs. 953 billion in Fiscal 2018 from Rs. 784 million in Fiscal 2017 depicting a growth of 22% y-o-y. China (Rs. 135.79 billion) was the largest export market for Indian organic chemicals in Fiscal 2018 in value terms followed by USA (Rs. 101.93 billion) and Saudi Arabia (Rs. 38.82 billion). Share of the top five countries in total exports of organic chemicals in Fiscal 2018, in value terms, stood at 36%.

Exports of inorganic chemicals from India in value terms, during the period from Fiscal 2014 to Fiscal 2018, has grown at a CAGR of ~7.9%. Fiscal 2018 portrayed a massive growth of 22% y-o-y in exports of organic chemicals. UAE (Rs. 19.57 billion) was the largest buyer of inorganic chemicals from India in Fiscal 2018, in value terms, followed by China (Rs. 7.65 billion) and USA (Rs. 7.05 billion). Share of top five countries in total exports of inorganic chemicals in Fiscal 2018 in value terms stood at ~41%.


  • Company is heavily reliant on the demand from application industries such as pharmaceuticals, agrochemicals, refrigeration and construction chemicals. Any downturn in the application industries could have an adverse impact on our Company’s business and results of operations
  • The manufacturing process involves the use of hazardous and flammable industrial chemicals which entails significant risks and could also result in enhanced compliance obligations.
  • Company is heavily reliant on certain customers and significant part of our revenue is generated from select clients and we do not have long term contracts with these customers.
  • The company has incurred significant indebtedness which exposes to various risks which may have an adverse effect on our business, results of operations and financial condition.
  • Company does not have long-term agreements with suppliers for some raw materials and an increase in the cost of, or a shortfall in the availability or quality of such raw materials could have an adverse effect on business and results of operations.

Company Description

Neogen Chemicals Ltd is a 27-year-old company specializing in Bromine based compounds, Grignard Reagents and Inorganic Lithium Salts. The company was founded by Mr H T Kanani, a chemical
engineer from IIT Mumbai.

Over the years Neogen has developed several Bromine based intermediates and is a leading manufacturer of these products to pharmaceutical agrochemical and other specialty chemical companies in India Europe and Japan with leading Innovator and Generic companies as its customers

A number of Neogen customers have been with Neogen for a long time. Apart from Bromination and Grignard chemistry, Neogen has also developed competencies in other related chemistries like Alkylation, Acylation, Friedel Craft, Couplings Chlorination etc.

With the acquisition of a new manufacturing site in Karkhadi, Vadodara, they are able to carry out multiple step synthesis in equipment of various sizes. Neogen is also focusing on Custom Synthesis and Contract Manufacturing.

Profit & Loss Statement:- (Consolidated)

(Rs. Crores)

DESCRIPTION Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 H1FY19
Gross Sales 79.90 91.48 108.89 121.47 164.01 96.03
Less: Excise / GST 6.09 7.56 8.58 11.40 2.85 0.00
Net Sales 73.81 83.92 100.30 110.07 161.16 96.03
Increase/Decrease in Stock -1.72 -2.91 -4.14 -5.53 -7.73 -15.40
Raw Material Consumed 46.54 52.65 65.23 69.56 102.56 70.60
Power & Fuel Cost 4.64 4.71 4.94 5.08 6.21
COGS 49.45 54.45 66.02 69.11 101.04 55.20
Gross Profit 24.36 29.47 34.28 40.95 60.12 40.83
Gross Profit Margin(%) 33.00% 35.00% 34.00% 37.00% 37.00% 43.00%
Employee Cost 3.44 4.76 4.54 5.45 8.70
Other Manufacturing Expenses 4.15 5.92 6.98 7.86 12.38
General and Administration Expenses 3.00 3.26 3.74 3.81 5.12
Selling and Distribution Expenses 2.09 2.73 4.03 3.21 4.39
Miscellaneous Expenses 0.20 0.15 0.88 0.64 0.54
Total Expenditure 62.33 71.26 86.19 90.08 132.17 79.27
EBITDA 11.48 12.66 14.11 19.99 28.99 16.76
EBITDA Margin(%) 16.00% 15.00% 14.00% 18.00% 18.00% 17.00%
Other Income 0.41 1.00 0.16 0.31 0.66 0.21
Interest 4.78 4.65 4.79 7.52 10.42 5.58
Depreciation 0.92 0.94 1.00 1.31 1.94 1.26
Profit Before Tax 6.19 8.07 8.48 11.47 17.30 10.25
Tax 2.55 2.98 3.30 3.82 6.84 2.36
Profit After Tax 3.64 5.09 5.18 7.65 10.46 7.89
Adjusted EPS 8.10 11.30 2.59 3.84 5.25 3.93
Source: Stockaxis Research, Company Data


The company is into specilaity chemical segment and is leader in our country. The company is currently trading at 27x FY19E EPS, which is relatively expensive considering among its peers. Hence we recommend NOT TO SUBSCRIBE this issue.

Key Information:

Use of Proceeds:
The Offer comprises of the Fresh Issue and the Offer for Sale

Offer for Sale: 2,900,000 equity shares of Rs. 10 each

Each of the Selling Shareholders will be entitled to the proceeds of the Offer for Sale after deducting their portion of the Offer related expenses and relevant taxes thereon. NCL shall not receive any proceeds from the Offer for Sale.

Fresh Issue:

Particulars Amount to be funded from Net Proceeds
Prepayment or repayment of all or a portion of certain borrowings availed by the Company: Rs. 20.50 crores
Early redemption of 9.8% FRCPS: Rs.11.50 crores
Long term working capital Rs. 20 crores
General corporate purposes. .

Book running lead managers:
Inga Advisors Private Limited, Batlivala & Karani Securities India Private Limited

Haridas Thakarshi Kanani: is the Chairman and Managing Director of our Company. He oversees the manufacturing, research and development and general operation and management of our Company’s manufacturing units. He holds a bachelor’s degree in chemical engineering from the Indian Institute of Technology, Bombay. He has previously worked with Excel Industries Limited. He then founded Chem Ocean Industries which set up one of India’s first Bromine plants using indigenous technology at Navalakhi, Gujarat. Due to a flood in the 1970s the Bromine Plant was destroyed, and he set up the firm Chem Ocean Consultant which provided consultancy, technology and engineering technologies to set up Bromine plants for other companies. In 1985 he set up Prachi Chemicals to manufacture organic and inorganic bromides. He then later established our Company in 1989 and has since served on the Board of our Company. Harin Haridas Kanani: is the Joint Managing Director of our Company. He heads various business divisions of our Company including research and development, business development, quality control, purchase, marketing and finance. He holds a bachelor’s degree in chemical engineering from the Indian Institute of Technology, Bombay and a master’s degree and a doctorate in chemical engineering from the University of Maryland. He has also served as a research fellow at the University of Maryland, where he has published 4 first author manuscripts in the field of chemical engineering, he has also presented various talks and presentations at national and international conferences. He has also participated in the Small and Medium Enterprises Programme from IIM Ahmedabad. He has previously worked with companies such as Asian Paints India Limited and as a senior research scientist at Pioneer Hi-Bred International Inc. in the United States. He joined our Company in 2008 as a general manager and has been on the Board of our Company as Joint Managing since the year 2017.