IPO REVIEW: OMKAR SPECIALITY

Intermediate chemical maker, Omkar Speciality Chemicals, plans to raise `79 crore to fund its expansion plans and working capital requirements. The company is looking at investing `47 crore in expanding its existing facilities (Rs 15 crore) and to set up an additional facility (Rs 32 crore). While, `10 crore will be used for working capital needs, the rest is to be used for general corporate and issue expenses.

Expansion

While the company makes over 90 products, iodine and selenium derivatives accounted for 88 per cent of Omkars revenues in 2009-10, with a major chunk coming from the pharmaceutical sector. The planned expansion will help Omkar achieve anear five-fold jump in current capacity of 750 million tonnes (to 3,650 million tonnes) by September 2012. Of this, about 200 million tonnes of fresh capacity will be added in the current quarter.

The company is expanding to meet current demand for existing products, enhance export sales especially to Europe and commercialise 15 new products. The capacity expansion will help Omkar increase its share of exports to total revenue from 10 per cent to 25-30 per cent over the next two years. The company believes its products, which are an equal mix of commodity and niche products, help to diversify its revenue and customer base and de-risk the business.

Financials and valuations

The company has been able to grow its revenues at a compounded annual growth rate of 29 per cent over FY06-FY10 with Ebidta and net profit growing at 45 per cent 39 per cent, respectively. The company believes it will be able to increase its margins, as a majority of its expansions are in the niche segment. While demand is expected to be strong and revenues are expected to move up in a steady manner, an experienced management, sound business model and past track record are other positives. However, on the operational side, the working capital cycle is currently on the higher side (about 3 months). More importantly, valuation at over 18 times (at lower price band) its annualised 2010-11 earning on post-IPO equity is also on the higher side compared to peer group, say analysts. Avoid .