Rossari Biotech (Rossari) has announced two acquisitions in the past two months, which will help the company add 58% to revenue and 48% to EBITDA (on full merger) with total outlay of Rs5.4bn, yet Rossari will continue to remain debt free, which is comforting. It would gain some backward integration and expand addressable market which will provide opportunity to cross-sell products among customers. The acquisitions will also expand Rossari’s footprint in exports market, which has been limited so far.

Rossari has announced two acquisitions. Rossari has announced two acquisitions driving inorganic growth. It announced acquisition of 100% equity stake in Unitop Chemicals on 2nd June’21 for Rs4.21bn and 100% equity buy-out in Tristar Intermediates on 17th July’21 for Rs1.2bn. Unitop had revenue of Rs3bn, and Tristar of Rs1.1bn in FY21. Inorganic growth will add 58% to revenue and 48% to EBITDA. Further, both acquisitions have come at reasonable valuations for Rossari and despite two mergers, Rossari will continue to remain debt free, which is comforting. Tristar acquisition provides Rossari entry into the lucrative market of non-toxic preservative – phenoxyethanol. Unitop has exposure to agrochemicals and O&G industries.

Acquisition - 1: Rossari agreed to buy 100% equity stake in Unitop Chemicals on 2nd June’21. Rossari has agreed to buy 100% equity stake in Unitop for Rs4.21bn wherein it would acquire 65% of equity (Rs2.7bn) immediately at the completion of acquisition, and remaining 35% (Rs1.5bn) in two tranches over the next two years. If we adjust for time value (10% discounting), the buyout works out to Rs4bn. The company garnered EBITDA of Rs430mn in FY20, while we don’t have EBITDA for FY21, and if we assume conservatively flattish EBITDA, then acquisition works to 9.3x (time adjusted) TTM EV/EBITDA which is relatively reasonable. Unitop is a debt free company; Rossari has raised equity of Rs3bn thus to remain debt free.

Unitop is a surfactants supplier with exposure to agrochemicals and oil & gas (O&G). Unitop was incorporated in 1980 and supplies surfactants (including ethoxylates, propoxylates, fatty alcohol etc), emulsifiers and other chemicals. It majorly sells formulations, but also has revenue from intermediate products. Its 60% revenue comes from agrochemical industry, where approval cycle is 3-4 years and 10% from O&G. Other industries are textiles, paints & pigments, leather, pulp & paper etc. Exports constitute 30% of revenue and Unitop supplies to 25 countries. It has a JV with a large Malaysian chemicals company Hextar Chemicals. Unitop has three manufacturing sites in India (Patalganga, Maharashtra; Dahej, Gujarat and Udhampur, J&K) with total capacity of 80,000mtpa. Its JV in Malaysia has a plant with total capacity of 6,000mtpa.

Unitop revenue grew at CAGR of 14.4% over FY17-21. Unitop revenue has grown at CAGR of 14.4% over FY17-21, which is driven by 27% CAGR growth in exports while domestic sales grew 11% during the same period. Rossari highlighted that plant utilisation was 65% in its earnings call for Unitop, which means it has headroom to grow revenue from existing facilities. The focus will be to drive higher revenue from formulation, which is the inherent strength of Rossari. Unitop has very little overlapping revenue with Rossari and supplies very little today to Rossari, which we believe may grow fast as Rossari can benefit from backward integration for its surfactants requirement (one of its core chemistry).

EBITDA margin has been between 13-17% over FY17-20. In four years (FY17-20), Unitop’s gross profit margin has averaged at 27% and has been in the range of 25-29%. However, EBITDA has been flattish over FY17-19, but has jumped sharply in FY20. Rossari has not disclosed Unitop’s EBITDA for FY21. It has guided that Unitop’s EBITDA would be ~15%, which is the average for past four years, which we believe is achievable. In fact we believe Rossari would help grow margins over the next few years.

ROIC for Unitop was healthy at average >20% (FY17-20). Gross asset turnover has been in tight range of 2-2.1x. Working capital days has averaged at 81days, which though has increased to 91days, should have been impacted by covid (rise in receivables) cases. FCF has not been equally impressive, and we could not find any reason behind lower operating cashflow for FY19 and FY20.

Why Rossari bought Unitop and synergies from acquisition? Surfactants is one of its four core chemistries (other three are acrylic polymers, silicones and enzymes). We believe Rossari will enjoy some level of backward integration for its surfactants requirements and thus, increase consolidated margins. Rossari and Unitop have very little overlapping business, which means Rossari can cross-sell products like acrylic polymers, which goes in agrochemicals but currently not catered by Rossari, to Unitop’s customers; and sell Unitop’s products to Rossari’s textile and HPPC customers. Rossari emphasised formulation is key proposition for both the companies, which is unique positioning for both. We don’t see much financial synergies and Unitop will continue to operate as an independent entity (subsidiary) with existing management continuing to manage the company.

We see risk of handling very hazardous material like EO for Rossari which requires higher safety norms and also has supplier concentration (sole supplier – Reliance Industries). Rossari promoters have to undergo learning / understanding of new industries of agrochemicals and O&G. Additionally, agrochemicals and O&G have steeper cycles than Rossari’s existing business, which will create volatility in business.

Scenario-1: Post-merger financial projections. Though we have not incorporated merged financial in our modelling, we are presenting how the financials may look like post-merger for Rossari. For this analysis, we have retained our assumption for Rossari, though increased backward integration should help in slight improvement in margins at consolidated levels.

We project Unitop’s revenue, EBITDA and PAT to grow at CAGRs of 13%, 16.1% and 11%, respectively over FY21-24E. Net profit is impacted by lower other income which earlier promoter earned on higher cash balance and thus, is strictly not comparable. We are taking asset turnover improve to 2.6x compared to 2.1x in FY17-20. Invested capital for Unitop is considered at acquisition price.

The merged entity revenue will grow at CAGR of 20% to Rs17bn in FY24E and EBITDA will grow at 22% CAGR to Rs3bn. We see net profit of Rs1.7bn / Rs2bn in FY23E and FY24E. The merged entity ROIC will continue to remain at the top quartile of chemical companies at 28-30%.

Acquisition - 2: Rossari agreed to buy 100% equity stake in Tristar Intermediates on 17th July’21. Rossari has agreed to buy 100% equity stake in Tristar for Rs1.2bn wherein Rossari would acquire 76% of equity (Rs0.9bn) immediately at the completion of acquisition, and remaining 24% (Rs0.3bn) over the next three years. If we adjust for time value (10% discounting), the buyout works to Rs1.15bn. The company did EBITDA of Rs156mn and net profit of Rs104mn in FY21, which means acquisition valuation of 11x (time adjusted) TTM P/E is relatively reasonable.

Tristar serves personal care industry and has presence in preservatives. Tristar was incorporated in 1998 and supplies preservatives (phenoxyethanol, and phenoxypropanol), aroma chemicals (phenoxy ethyl isobutyrate, phenyl ethyl isobutyrate and allyl phenoxy acetate) and additives with largely serving dye stuff industry. Tristar supplies chemicals to various companies in India, Europe, US and far East countries; its exports is 53% of total revenue. It earns 60% of revenue from personal care industries and also has exposure to pharmaceuticals, textiles, paints, automotive, agrochemicals and others. Tristar has manufacturing facilities at Sarigam (Vapi, Gujarat) with total capacity of 15,000mtpa. Tristar had revenue of Rs1.1bn in FY21 with EBITDA of Rs156mn (14%) and net profit of Rs104mn.

Scenario-2: Underlying trading valuation for Rossari. We are yet to completely evaluate Tristar, but we like its presence in non-toxic preservatives (phenoxyethanol) which is replacing paraben. Though we believe Rossari is incrementally getting into manufacturing from earlier moot of formulation, we would wait to see integration of new companies. Existing promoters will continue for next three years at least and this should help in handholding transition of Tristar, which is comforting. 

Though we don’t have any great visibility into financial of Tristar, for our analysis, we have factored 15% CAGR growth over the next 3 years. For working attributable net profit for Rossari, we have considered equity stake bought by Rossari from promoters each year. The buyout has been spread equally across the balance period which means Rossari will buy 17.5% equity stake each of two years in Unitop and 8% equity stake each of three years in Tristar.