Should you raise capital when it’s needed or when it’s available?
Depends on who you ask this question to.
Nowadays, large bankers prefer to raise capital whenever it’s available cheap, given the challenging credit market conditions.
But a speciality chemical company chalking out a fund raising plan within 8 months of concluding the blockbuster IPO (Initial Public Offer) may raise some eyebrows.
Rossari Biotech is a case in point.
Rossari Biotech went public in July 2020 by launching an IPO of Rs 500 crore. Of this, the fresh issuance was only worth Rs 50 crore and the rest was Offer For Sale (OFS), wherein promoters tendered a part of their holdings.
During the pre-IPO round of fund raising, Rossari garnered Rs 150 crore from 15 anchor investors by issuing 35,02,940 equity shares at Rs 425 each. The list of marquee investors includes the likes of Goldman Sachs India, Abu Dhabi Investment Authority, HDFC Life Insurance Company, HDFC Mutual Fund, SBI Mutual Fund, Sundaram Mutual Fund, Axis Mutual Fund, ICICI Mutual Fund and various schemes of Malabar Funds, amongst others.
According to a disclosure to exchanges dated March 23, 2021, the company is planning to raise Rs 300 crore of equity through the preferential allotment route. Rossari will issue up to 30,12,046 shares for which Rs 996 has been set as the floor price per share.
With this, the company’s paid up equity share capital base will increase from Rs 10.386 crore (5,19,29,390 shares of the face value of Rs 2/each) to Rs 10.988 crore (5,49,41,436 shares of the face value of Rs 2/each).
(Source: Company records)
As depicted in the table above, some investors that participated in the pre-IPO round are willing to increase their stake by paying 134% more than the IPO allotment price of Rs 425.
The company is hopeful that the fresh capital infusion will provide it with flexibility to approach growth opportunities more effectively and strengthen the balance sheet, besides extending the list of marquee shareholders.
Rossari Biotech aims to utilize the proceeds of the proposed issue for inorganic growth. The company is hopeful that the inorganic route will help it diversify within its core chemistries, roll out a new range of eco-friendly products catering to more end-user industry applications and expand its geographical reach.
Rossari's Red Herring Prospectus (RHP) filed with SEBI at the time of the IPO had clearly outlined the company’s growth aspirations.
“We have identified certain strategic investment or acquisition opportunities which includes entering into a joint venture agreement with certain third parties and acquisition of balance stake in our Subsidiary, Buzil Rossari. While we seek to make such strategic investments or enter into any such acquisitions on an opportunistic basis, as on the date of this Red Herring Prospectus, we have not entered into any agreement or arrangement towards these,” mentioned the RHP.
On the backdrop of the recent announcement of fund raising, the management’s commentary on business prospects and expansion plans would be crucial. The company has called for an Extraordinary General Meeting (EGM) on April 17, 2021.
Long term investors are better off keeping themselves abreast with such developments since capital allocation decisions often have long-term implications for shareholders.
Data as on March 25,2021
The company has a solid financial profile—strong profits and debt-free balance sheet. Rossari Biotech generated a net profit of Rs 65 crore in FY20 and has made Rs 58 crore in 9MFY21. It is sitting on a reserve of Rs 353 crore. The annualized EPS of the company for 9MFY21 has been Rs 14.98 which translates into a P/E multiple of ~70.
It takes a lot of conviction in the potential EPS growth to be an investor at these valuations!
Please Note (read as a disclaimer): None of the stocks discussed in the article are recommendations to buy, hold or sell. This could just be the starting point for deeper analysis that you might want to carry out on your own. You may also take professional help as you feel appropriate.
If you are investing in any family run company, besides governance, you may also want to take stock of significant developments in the lives of the promoters. Sometimes, their personal life can overshadow market sentiments. Also pay attention to issues such as pledging of shares by the promoter group and the working capital.
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We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.