IPO: Kronox Lab Sciences

Kronox Lab Sciences, a chemical manufacturer, will launch its IPO (initial public offering) on June 3, 2024. Below is a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision. In a nutshell Quality : Kronox's three-year average ROE (return on equity) and ROCE (return on capital employed) are 35.8 and 49.1 per cent, respectively. Growth : Between FY21 and FY23, its revenue grew 23.7 per cent, while net profit contracted 30.8 per cent per annum. Valuation : The stock is valued at a P/E (price-to-earnings ratio) of 28.1 and a P/B (price-to-book ratio) of 8.4 times. Overview: The Indian chemical industry has grown rapidly since the pandemic began in FY20. The China +1 strategy, too, has created significant opportunities for the sector. Kronox stands to benefit from these developments. However, it faces stiff competition from numerous small and large companies vying for market share. About Kronox Lab Sciences Incorporated in 2008, Kronox Lab Sciences manufactures specialty chemicals and intermediates used across various industries. It sells its products in 20 countries. Pharma chemicals are the company's largest segment, accounting for 45 per cent of domestic revenue. Laboratory testing and food processing contribute 27 per cent and 24 per cent to the domestic business, respectively. Meanwhile, its export business contributed nearly 25 per cent to the overall revenue as of nine months ending December 2023. Strengths of Kronox Lab Sciences Client retention: Manufacturing niche specialty chemicals for clients requires a lengthy R&D (research and development) and audit process. This creates significant exit costs for clients. As a result, it becomes costly for them to switch suppliers, ensuring they stick with the company. Kronox maintains a sales record of over five years with almost one-third of its client base despite having no long-term contracts. Weaknesses of Kronox Lab Sciences Heavy reliance on pharma and biotechnology industries: Over 70 per cent of Kronox's revenue was linked to the pharma and scientific research segments as of nine months ending December 2023. A slowdown in these industries can significantly impact the company's financial performance. Revenue concentration: Kronox caters to over 500 clients. However, its top 10 clients contribute nearly 45 per cent of total revenue. A walkout or reduced demand from even one key client can adversely affect the company's financials. IPO details Total IPO size (Rs cr) 130 Offer for sale (Rs cr) 130 Fresh issue (Rs cr) 0 Price band (Rs) 129 - 136 Subscription dates June 3 to 5, 2024 Purpose of issue Offer for sale Post-IPO M-cap (Rs cr) 505 Net worth (Rs cr) 60 Promoter holding (%) 74.2 Price-to-earnings ratio (P/E) 28.1 Price-to-book ratio (P/B) 8.4 Financial history Key financials 2Y growth (% pa) Nine months ending December 2023 FY23 FY22