Stallion India Fluorochemicals IPO analysis

Stallion India Fluorochemicals IPO (initial public offering) will open for subscription on January 16, 2025 and close on January 20, 2025. Below is a breakdown of the refrigerant gas seller's strengths, weaknesses and growth prospects to help investors make an informed decision.

Stallion India Fluorochemicals IPO in a nutshell

• Quality: Between FY22 and FY24, Stallion India Fluorochemicals reported an average three-year ROE and ROCE of around 20 and 26 per cent, respectively.
  
• Growth: Between FY22 and FY24, its revenue grew by 12 per cent, and net profit declined by 16 per cent annually.
  
• Valuation: At the upper price band of Rs 90, the stock will be valued at a P/E and P/B ratio of around 48.3 and 2.4 times, respectively.
  
• Overview: Stallion India Fluorochemicals is expected to benefit from the expanding Indian fluorochemicals and specialty gases market, which is projected to grow 16-18 per cent annually from 2024 to 2029. This growth trajectory is supported by rising demand from various industries, including electronics, healthcare, and manufacturing.

About Stallion India Fluorochemicals

Incorporated in 2002, Stallion India Fluorochemicals primarily sells refrigerant and industrial gases. The business involves debulking (breaking down large quantities of gases into smaller units), blending (mixing gases for specific purposes), and processing (treating them to meet quality standards). The company also sells these gases through ready-to-use pre-filled cans and small cylinders. The gases find application in various industries such as air conditioners, refrigerators, fire safety, semiconductors, automobiles, pharmaceutical and glass bottle manufacturing.

The company mainly sells its products in Maharashtra and Delhi, contributing to almost 70 per cent of its revenue in FY24. It derives 82 per cent of the revenue from sales of gases and the rest from other products such as cylinders, spare parts, washer pumps, cans and vacuum pumps. It holds a 10 per cent market share in India's fluorochemicals and specialty gas industry.

Strengths of Stallion India Fluorochemicals

• High entry barriers: The fluorochemicals and specialty chemicals business is tough to enter into. It requires specialised knowledge, significant capital investment and strict compliance with regulations. This keeps competition low. Together, the top four companies hold nearly 78 per cent of the market share.

Weaknesses of Stallion India Fluorochemicals

• Revenue concentration: The company derives almost 76 per cent of the revenue from its top 10 customers. Since it has no long-term agreements with them, losing even a key customer can significantly impact the company's financials.
  
• Dependence on imported raw materials: As of FY24, the cost of raw materials (refrigerant gases) made up 83 per cent of the company's revenue. Most of the raw material is imported from China, and their prices are vulnerable to the global supply and demand situation. Any disruption could reduce the company's margins.

Risk report

Company and business

• Did Stallion India Fluorochemicals report earnings before tax of Rs 50 crore or more in the last 12 months?
  No. The company reported earnings before tax of Rs 21 crore for FY24.
  
• Will the company be able to scale up its business?
  Yes. The Indian fluorochemicals and specialty gases market is projected to grow 16-18 per cent annually from 2024 to 2029, indicating a favourable market environment that could support the company's growth.
  
• Does the company have recognisable brands with client stickiness?
  Yes. The company has an average relationship tenure of three to four years with its top 10 customers.
  
• Does the company have a credible moat?
  Yes. The fluorochemicals industry has high entry barriers due to the need for specialised knowledge.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters hold over a 25 per cent stake in the company?
  Yes. After the IPO, the promoters will have around 68 per cent stake in the company.
  
• Do the top three managers have over 15 years of combined leadership at Stallion India Fluorochemicals?
  Yes. The company's Chairman and Managing Director, Shazad Sheriar Rustomji, has been with the company since its incorporation in 2002.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information to suggest otherwise.
  
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
  
• Is Stallion India Fluorochemicals free of promoter pledging of its shares?
  Yes. The promoters have not pledged their shares.

Financials

• Did Stallion India Fluorochemicals generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  No. It has a three-year average ROE and ROCE of around 20 and 26 per cent, respectively. In FY24, the company reported an ROE and ROCE of around 12.5 and 13.9 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  No. It reported negative cash flow from operations in two of the last three years.
  
• Is the company's net debt-to-equity ratio less than one?
  Yes. As of September 30, 2024, the company's net debt-to-equity ratio stood at 0.4 times.
  
• Is the company free from reliance on huge working capital for day-to-day affairs?
  No. The company has significant working capital requirements due to its long receivable days. It takes almost four months for the company to receive payment from customers. The company relies on short-term debt to meet its working capital needs.
  
• Can the company run its business without relying on external funding in the next three years?
  No. The company has negative operating cash flow and will allocate most of the IPO proceeds to working capital. It will likely need to raise external funds for any future capex.
  
• Is the company free from meaningful contingent liabilities?
  Yes. The company's contingent liabilities stood at 2 per cent of its net worth as of Q2 FY25.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock offers an operating earnings yield of 3 per cent on its enterprise value.
  
• Is the stock's price-to-earnings less than its peers' median level?
  Yes. The stock is valued at a P/E ratio of 48.3 times compared to its peers' median level of 69.7 times.
  
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The stock is valued at a P/B ratio of 2.4 times compared to its peers' average level of 6.7 times.

Assessing an IPO requires a careful evaluation of a company's strengths, weaknesses, and growth potential, just like we've outlined for Stallion India Fluorochemicals. But wealth creation can only be achieved through a well-researched, balanced stock portfolio.

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Disclaimer: This story is not a stock recommendation. Investors should do their due diligence before investing.

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