20 Microns IPO Analysis

Promoted by Chandresh S Parikh and seven others, 20 Microns was incorporated in Gujarat in 1987 to manufacture white non-metallic minerals in India. The company is a leading manufacturer of micronized mineral products including micronised ground calcium carbonate, china and calcined clay, talc, dolomite, silica, mica and whiting (calcite and calcium carbonate), which finds application in the paints, plastics, rubber, ceramic, paper and other industries as functional fillers.

The mining resources and plants are strategically located in Rajasthan, Gujarat, and Tamil Nadu. With eight manufacturing facilities located in different strategic regions that are closer to its key markets, 20 Microns also has four mines of ground minerals, ensuring unhindered supply of raw materials at lower cost. The four mines comprise 72 hectors of mining area and permission has been sought for further 1,000 hectors of additional mining area.

With a turnover of 1,70,000 tonnes per annum, 20 Micron is a leader in white minerals including ultra-fine minerals ranging from 20 microns to 2 microns of particle size and is planning to introduce sub-micronized grades and nano-additives. Sub-microns and nano-additives are processed non-metallic minerals used as import substitute in various chemicals and polymers in paints, PVC pipes, paper, cement and ceramics. The company's clients include Finolex Cables, Berger Paints, Asian Paints, Goodlass Nerolac Paints, ICI India and Pidilite Industries.

Higher value added technology intensive, import substitute product like sub microns will be introduced in existing capacities at Vadadla (Gujarat), Bhuj (Gujarat) Tirunelveli (Tamil Nadu) and Udaipur (Rajasthan). Finer and pure material with size up to 0.7 microns will be produced at the expanded facilities.

Strengths

• Has mining rights in four different locations leased from the Union government for 20 years, thus enabling sourcing of raw materials at lower cost.
• Has a diversified product mix catering to various industries, thus providing a hedge against any downturn in any industry or product.
• R&D capabilities have been used to manufacture innovative value-added products such as sub-microns and nano additives.

Weakness

• Various pending legal proceedings related to Central excise, sales tax and labour could have a monetary impact of more than Rs 10.50 crore--a significant sum compared with the size of operations.
• Faces extreme competition from the unorganised sector/tiny sector, which is able to supply materials at lower cost due to exemption from excise duty.

Valuation

The issue comprises fresh issue of 16,75,000 equity shares and an offer for sale of 26,75,632 equity shares by the selling shareholders (Gujarat Venture Capital Fund 1995).

20 Microns has set a price band of Rs 50-Rs 55 per equity share of Rs 10 each, translating into a PE of 15.2x at the lower price band and 16.7x at the higher price band, based on the earning per share of Rs 3.3 in the year ended March 2008 (FY 2008) on post-IPO equity. Though there are no strictly comparable companies, one can refer to the valuations of English India Clay and Ashapura Minechem for assessing the kind of P/E 20 Microns can command. Currently, English India Clay is trading at P/E of 16 and Ashapura Minechem is trading at P/E of 7.