Kronox Lab Sciences manufacture high purity speciality fine chemicals for diversified end user industries. It manufactures products compliant with reagents, pharmacopeia, and various food grade standards used in the pharmaceutical, nutraceutical, veterinary, food, biotech, chemical analysis and research, metallurgy, personal care and other specialty markets. The company’s product groups include acetates, carbonates, chlorides, citrates, hypophosphates, nitrates, nitrites, phosphates, sulphates, and other ultra-pure fine chemicals.

The company manufacture high purity speciality fine chemicals of various grades in particle sizes ranging from 10 mesh to 100 mesh. The high purity speciality fine chemicals are used mainly as reacting agents and raw material in the manufacturing of Active Pharmaceutical Ingredients (APIs), excipients in pharmaceutical formulations, reagents for scientific research and laboratory testing, ingredients in nutraceuticals formulations, process intermediates and fermenting agents in biotech applications, ingredients in agrochemical formulations, ingredients in personal care products, refining agents in metal refineries and ingredients in animal health products, amongst others.

The company products are manufactured in accordance with industry standards like IP (Indian Pharmacopoeia), BP (British Pharmacopoeia), EP (European Pharmacopoeia), JP (Japanese Pharmacopoeia), USP (U.S. Pharmacopoeia), FCC (Food Chemical Codex), LR (Laboratory Reagent), AR (Analytical Reagent), GR (Guaranteed Reagent) and ACS (American Chemical Society) in addition to custom manufacturing specifications, which differ from the industry standards, required by customers in select cases.

The company 185 products spanning across the family of phosphate, sulphate, acetate, chloride, citrate, nitrates, nitrites, carbonate, EDTA (Ethylene diamine tetra acetic acid) derivatives, hydroxide, succinate, gluconate, among others are supplied to customers in India and more than 20 countries globally.

In addition to the manufacturing of products in accordance with various domestic and international standards, it also undertake custom manufacturing to achieve high levels of purity, as specified by the client, having different purity levels than the prescribed industry standards.

The company has three manufacturing facilities situated at Vadodara in Gujarat which are close to the seaports of Mundra, Kandla, Hazira and Nhava Sheva and is spread across 17,454 sq. mtrs. and as on December 31, 2023, have an aggregate installed capacity of 7,242 TPA (tonne per annum).

The company’s unit 1 comprises of 2 manufacturing blocks with an aggregate installed production capacity of 2,400 TPA, and is equipped with glass-lined and stainless-steel reactors with switch capacities ranging between 1 kl to 5 kl, along with various filtration, centrifugation and drying system The company’s unit 2 has an aggregate installed production capacity of 3,744 TPA and is equipped with glass-lined and stainless steel reactor switch capacities ranging between 1.5kl and 3kl, along with various pulverisers, filtration, centrifugation and drying system. The company’s unit 3 has an aggregate installed production capacity of 1,098 TPA and is equipped with glass-lined and stainless-steel reactor switch capacities ranging between 1.5 kl and 3 kl, along with various pulverisers, filtration, centrifugation, and drying system

To meet requirements of new customers, the company intends to establish a new manufacturing unit at GIDC (Gujarat Industrial Development Corporation) Dahej – II Industrial Estate and the company have acquired land admeasuring to 20,471 sq. meters for the said facility.

The primary raw materials essential to the manufacturing high purity speciality fine chemicals are citric acid, phosphoric acid, potassium hydroxide, sodium hydroxide, soda ash, potassium carbonate, sodium bicarbonate, acetic acid and among others. It procure raw materials essential for manufacturing its products from domestic vendors on a purchase order basis. It usually do not enter into long-term supply contracts with any of raw material suppliers.

The promoters of the company are Jogindersingh Jaswal, Ketan Ramani and Pritesh Ramani.

The Offer and the Objects

The offer comprises an offer for sale of up to 9570000 equity shares, aggregating Rs 130 crore at the upper price band of Rs 136 and Rs 129 crore at the lower price band of Rs 129.

Promoter shareholder Jogindersingh Jaswal stake post-issue will decrease to 26.4% from 34.99% pre-issue shareholding, Ketan Ramani stake post-issue will decrease to 26.4% from 34.99% and Pritesh Ramani stake post-issue will decrease to 21.4% from 30%. The promoter selling shareholders will be entitled to the entire proceeds of the offer after deducting the offer expenses and relevant taxes thereon. The company will not receive any proceeds from the offer.

Strengths

The company manufactures a broad range of high purity speciality fine chemicals belonging to the family of citrates, carbonates, phosphates, acetates, sulphate, EDTA derivatives, chlorides, hydroxide, bromide, nitrites, and nitrates. Their products have applications across a wide spectrum of industries like pharmaceuticals, scientific and laboratory research, nutraceuticals, biotech, agrochemicals, personal care, metallurgy and animal health. Over the years, they have expanded their product portfolio to more than 185 products. In addition to manufacturing products as per these standards, they also undertake custom manufacturing of High Purity Speciality Fine Chemicals to achieve different levels of purity as specified by the customer for their specific requirements.

The company has served more than 592 customers in the last 3 financial years and during the 9 months period ended December 31, 2023, of which 141 customers amounting to 23.82% of total customers placed repeat orders. The average tenure of relationship with top 20 customers is 7 years, 8 years and 9 years for fiscals 2023, 2022 and 2021, respectively.

High entry and exit barriers due to long customer approval cycles and strict product standards.

The company’s robust balance sheet, positive operating cash flows coupled with zero debt position enable it to fund its strategic initiatives, pursue opportunities for growth and better manage unanticipated cash flow variations.

The company has 3 strategically located manufacturing facilities which are located in Padra, Vadodara, Gujarat, which is in close proximity to several ports including Kandla, Mundra, Hazira and Nhava Sheva thereby providing the company with a cost and logistical advantage. Also the manufacturing facilities are in proximity to DMIC and Delhi-Mumbai Expressway and have access to rail and airport facilities. Further, the manufacturing facilities are located in Gujarat, where some of the major APIs, pharmaceutical formulations, nutraceuticals, biotech and other application industries are located. The company’s manufacturing facilities are located in close proximity to each other, thereby ensuring greater logistic synergies and operational efficiencies.

The company has set up an in-house research, development and testing laboratory (RDT Laboratory) to develop new products and test the products against the specified industry standards or customer specifications. For the 9 months periods ended December 31, 2023, December 31, 2022, and fiscal 2023, fiscal 2022 and fiscal 2021, the company manufactured and sold 188, 155, 157, 156 and 159 products, respectively.

The company’s experience and expertise of 15 plus years in the industry has helped it to capitalize on new opportunities offered by the customers. The company has expanded its product portfolio to more than 185 products spread across diverse applications. Further, the company is working towards new products forming a part of the family of acetate, adipate, ascorbate, aspartate, benzoate, citrate, EDTA, gluconate, glycinate, lactate, malate, orotate, propionate, sorbate and succinate, among others.

Over the years, it has expanded its scale of operations and global footprint with customers in over 20 countries including United States, Argentina, Mexico, Australia, Egypt, Spain, Turkey, United Kingdom, Belgium, United Arab Emirates, China, among others. Kronox Lab Sciences revenue from exports have grown at a CAGR of 37.46% between fiscal 2021 and 2023. For nine months periods ended December 31, 2023, and for the fiscals 2023, revenue from exports (excluding merchant exports) amounted to R 16.97 crore, and Rs 24.268 crore, and accounted for 25.07%, and 25.39% of revenue from operations, respectively.

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Weaknesses

The company products are required to meet domestic and international industry standards. Any failure on its part to meet these standards required by the customer could lead to rejection of products or even a suspension of orders from the customer.

The company products are supplied in limited quantities for specific use by application industries. Any reduction in the requirement of its products may result in loss of business and may affect its financial performance and condition.

The company top 20 products contributed 60.49%, 70.58%, 68.62%, 69.85% and 70.04% of its revenue for the nine months period ended December 31, 2023, December 31, 2022 and the fiscal 2023, fiscal 2022 and fiscal 2021, respectively. The concentration of its product sales being dominated by top 20 products makes it vulnerable to demand risks for these products.

The majority of sale of its products is concentrated in industries viz. Pharmaceuticals and Scientific Research and Laboratory Testing. Any change in demand or change in application or processes by its customers in these industries may lead to loss of revenues and profits.

The company may not be able to expand its production capacity and products manufactured at Unit – III as GPCB has restricted any such expansion in the area where its Unit – III is situated i.e. Padra region, near Vadodara, Gujarat due to ground water contamination related issues. It is therefore limited to the manufacturing of only certain products at Unit - III that are viable under such restrictions. Hence, there has been a decrease in the capacity utilization for aforementioned periods. Capacity utilization for Unit- III has decreased from 92.58% in FY2021 to 22.93% for 9MFY2024.

The average utilised capacity of its manufacturing units is 50.47%, 67.23%, 70.98% and 78.36% for the nine months period ended and fiscals 2023, 2022 and 2021 and may reduce in future due to various factors including raw material availability, product requirements of customers, product mix, product cycle, availability of man power, industry and market conditions may adversely affect the operations.

The company face competition primarily from domestic and international companies including Canton Laboratories Private Limited (India), Jost Chemicals, USA, (Czech Republic), Budenheim (Germany), Jiangsu Kolod Food Ingredients Co. Ltd. (China), CFL Chemische Fabrik Lehrte GmbH & Co. KG (Germany) and Ichimaru Co. Ltd. (Japan), amongst others.

The process of customer approval is long and stringent and it usually takes average 18 months to get customer approval and involve high cost of development. In the event of delay or non-receipt of approval of customers for product may result into loss of investment and resources in the product development.

The company is subject to operating risks associated with handling of various chemical substances and certain raw materials such as possibility for leakages and ruptures from containers, explosions, and the discharge or release of hazardous substances.

The company business operation requires significant working capital specifically for raw materials, work in progress and finished goods to undertake manufacturing operations.

The company customers expect it to obtain and maintain certain certifications and any failure by its part to obtain and maintain such certifications may affect its reputation, business, results of operations and financial condition.

The company operations are subject to extensive government regulations and is required to obtain and maintain a number of statutory and regulatory permits and approvals under central, state and local government rules in India, generally for carrying out business operations.

Valuation

In the nine months ended Dec 2023, standalone sales were down by 9% to Rs 67.69 crore. The OPM increased 610 bps to 30.2% leading to 14% increase in OP to Rs 20.46 crore. OI decreased by 58% to 0.75 crore. Interest cost was nil compared to Rs 9 lakh. Also,depreciation decreased by 17% to 1 crore. PBT increased by 10% to Rs 20.21 crore. Net profit rose 10% and stood at Rs 15.47 crore as against net profit of Rs 14.09 crore in the same period last year.

For FY2023, standalone sales were up by 16% to Rs 95.98 crore.The OPM fell 90 bps to 23%, leading to 12% increase in OP to Rs 22 crore.Other income was up 76% to Rs 1.78 crore, while interest cost decreased 77% to Rs 9 lakh and depreciation fell 26% to Rs 1.5 crore. PBT increased 22% to Rs 22.33 crore. Tax expenses were 21% higher at Rs 5.71 crore. Net profit increased 22% to Rs 16.62 crore.

The TTM EPS on post-issue equity works out to Rs 4. At the upper price band of Rs 136, TTM P/E works out to 34.

As of 01 June 2023, its nearest available reference listed peers such as Tatva Chintan Pharma Chem trades at TTM P/E of 79.7, Tanfac Industries trades at TTM P/E of 38.0, Neogen Chemicals trades at TTM P/E of 109.9, Sigachi Industries trades at TTM P/E of 36.6 and DMCC Speciality Chemical trades at TTM P/E of 69.2.

Kronox Lab Sciences Ebitda margin for 9MFY2024 stood at 30.2% while Tatva Chintan Pharma Chem Ebitda margin was 17.8%, Tanfac Industries was 19.8%, Neogen Chemicals was 15.2%, Sigachi Industries was 20.5% and DMCC Speciality Chemical was 11.3%.

For FY2023, Kronox Lab Sciences ROE stood at 37.2% compared to 8.8% for Tatva Chintan Pharma Chem, 30.5% for Tanfac Industries, 10.4% for Neogen Chemicals, 16.2% for Sigachi Industries and 3.5% for DMCC Speciality Chemical.