Wednesday, June 23, 2010


Issue Highlights
Industry: Chemical
Issue Size in Cr. 53.10
Price Band in (Rs.) 112-118
Offer Date 24-Jun-10 & Close Date 28-Jun-10
Face Value 10, Lot Size 50
IPO Grade BWR IPO Grade 2 - Indicating below average fundamentals

Aster Silicates Limited (ASL) is engaged in the business of manufacturing of sodium silicate
which includes food grade sodium silicate, special drilling grade silicate and detergent
grade silicate. The company produces sodium silicate both in glass and liquid form. Food
grade sodium silicate is used in the manufacturing of Silica precipitate and Gel which finds
its applications in toothpaste, salt, cosmetics, glucose powder, tyre & rubber and pesticides
etc. Sodium silicate, (special drilling grade silicate) is also used in off-shore drilling and for
reactivation of old oil and gas fields. The sodium silicate manufactured by ASL is also used in
water-proofing, in foundries and for investment casting, paper, silica gel, textiles and
Currently, the company operates from two manufacturing units in Gujarat having an
aggregate installed capacity of 150 MT of glass/day. Unit I has three furnaces with an
average combined capacity of 100 MT of glass/day. All the three furnaces are triple pass
regenerative and recuperative end fired glass furnace with multiple fuel arrangement,
capable of using bio gas, coal and also natural gas. Unit II has a single furnace with a
capacity of 50 MT of glass/day, which is also triple pass regenerative and recuperative end
fired glass furnace.


Sound understanding in the line of business
Over a decade of experience in the business have made its promoters to be active in terms
of the technological changes and other factors, which affect the business operations of
companies. Company is amongst the early movers to switch their raw material from soda
ash to caustics, as the same is a better reactant as compared to the former.
Location and Cost Benefits
The company's manufacturing facilities located in Gujarat provides it with the logistics and
material handling advantage. Its major suppliers and clients are within a 10 km radius, thus
saving logistics costs and efforts.

Flexibility to adopt technology
The company found great opportunity in moving from the conventional fossil fuels to
biogas, resulting in additional cost savings. As its furnaces in manufacturing facilities has
the capability to use multiple fuels, in case of unavailability of a particular fuel, company's
production is not affected due to the flexibility of multiple fuel arrangements.


Technological investment
With the changing market scenario, new and advanced technologies are being developed
for various processes for manufacturing sodium silicate. The company had invested in
latest technologies for manufacturing sodium silicate such as triple pass regenerative and
recuperative end fired glass furnace with multiple fuel arrangement, keeping abreast of the
latest trends and advancements.

Reduce operational costs and increase cost competitiveness
The Company intends to maintain the operational efficiencies at the highest possible level
as compared to its peers in the industry. By reducing administrative costs, storage cost,
transportation costs and inventory levels the company is trying to improve its cost


Lack of long term contracts with customers and suppliers
ASL's top five customer contribute approximately 83.08 percent of the sales for FY
2010.Any decline in the quality standards or growing competition or change in the demand
for the product by these customers may adversely impair company's ability to retain these
customers. Also its top five suppliers contributed approximately 98.83% of the purchases
for FY2010 that makes ASL prone to highly concentrated to customers as well as suppliers.

Lack of arrangements of working capital funds
ASL has estimated additional working capital requirement of Rs. 26.61cr for FY 2011, of
which Rs. 7.5Cr would be funded out of the Issue Proceeds, whereas the balance amount
i.e.Rs. 19.12 Cr would be arranged by way of borrowings from Banks. However, as on date
no arrangement for the same has been finalized by the company.

Negative Cash Flows from operations and investing activities
The cash flow from operating activities was negative in the FY 2007, 2008 and 2009 and
cash flow from investing activities has been negative for all the years. Sustained negative
cash flows could impact company's growth and profitability.

Considering the P/E valuation, the company is trading at pre issue P/E of 26.24x on the
lower side of the band and 27.65x on the higher side of the band of its FY10 EPS of
Rs.4.27.Looking at the post issue valuation,the company is trading at P/E of 37.64 times on
the lower side and 40 times on the higher side of its post issue FY10 EPS of Rs.3.At its P/B
ratio it trades at 5.73 and 6 multiples of the lower and higher band of its pre issue book value
of Rs.20 and 2.27x and 2.39x on the lower and higher side of its post issue book value of Rs.
49.34 respectively.

The company expansion of 300MTPD plant capacity which will come into effect in January
2011 would give huge fillip to its revenues and bottomline . Considering stable margins,
the enhanced capacity would lead to three times of the profitability in FY12 compared to
FY10.The moment plant becomes operational it would run on near to the existing capacity
utilization rate i.e 83 percent. However considering the price, company is offering, the stock
looks expensive as the P/E multiple would come down after two year forward earning. Also
40MTPD capacity addition in FY10 accelerated its debtors collection period to 101 days due
to its better credit terms and so tripling the existing capacity puts question mark for its
additional working capital requirement. Moreover the industry in which the company
operates does not require any technology edge and huge capital and so any player can
easily enter the industry.

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