20 Microns Nano Minerals Limited: a close look at the DRHP

20 Microns Nano Minerals Limited processes and sells specialty chemicals — a range that includes functional additives, chemically modified minerals, soft minerals and hard minerals. It relies on its corporate promoter for sales and marketing. The company is raising money through a fresh issue of equity shares to be listed on the SME platform of NSE (NSE EMERGE). The proceeds will fund a new manufacturing facility in Vadodara, Gujarat, and general corporate purposes. Promoters hold 99.76% of the pre-issue equity. The issue will dilute their holding and create a public market for the stock. ¹

What the company does

20 Microns Nano Minerals buys mineral raw materials, processes them into specialty chemicals, and sells them to industrial customers. Its product categories are Functional Additives (FA), Chemically Modified Minerals (CMM), Soft Minerals (SM), and Hard Minerals (HM). ²

The company has a long-term arrangement with its corporate promoter, 20 Microns Limited, to market and sell its products through the promoter’s network. This is a central feature of its business model. ²

Customer concentration is high. In FY2015, FY2016, and FY2017, the top 10 customers accounted for around 59%, 57%, and 59% respectively of revenue from operations. ³ This means that losing even one or two of these customers could materially affect revenue. The company does not have long-term or definitive agreements with its customers; it operates on purchase orders that govern volume, pricing, and other terms of sale. ⁴ Similarly, it has not entered into long-term agreements with its raw material suppliers. ⁵

The company exports to Nigeria, Saudi Arabia, and Sri Lanka, and has achieved cumulative exports of ₹10.68 crore over five years. ³ Exports provide geographic diversification, though the number of destination countries is small.

The DRHP lists six competitive strengths: a diversified product portfolio, diversified user industries, import substitution, support from the holding company, product innovation and R&D, and a strong management team. ⁶ The through-line across these is that the company competes not by being the lowest-cost producer but by offering a broad range of products that serve multiple industries — paints, plastics, construction, cosmetics, and others — and by substituting imported specialty chemicals with domestically produced alternatives. The support of 20 Microns Limited, which has its own market presence and brand, is presented as a structural advantage rather than a dependency.

Industry and market

The Indian specialty chemicals market (excluding agrochemicals and dyestuff) was estimated at ₹1,000 billion in FY2017⁷, growing at 10-12% CAGR from FY2014 to FY2017⁸. CRISIL Research forecasts 12-14% CAGR going forward. ⁸ Within this broad category, several sub-segments have expected growth rates: construction chemicals at 15% CAGR over the next three years, water chemicals at 15% CAGR over the next five years, personal care ingredients at 15% CAGR over the next three years, and polymer additives at 10% CAGR over the next three years. ⁸

The industry is highly fragmented, with small and medium enterprises holding 70-75% market share. ⁸ Only a few Indian players have the scale to compete with global giants on product development. ⁹ This fragmentation means that a focused player like 20 Microns Nano Minerals can carve out a niche without directly confronting multinational corporations on their home turf.

Demand is driven by rising GDP, urbanization, improved consumption standards, and government initiatives¹⁰. FDI up to 100% is allowed in the sector¹¹, and a Draft National Chemical Policy aims to increase the chemical sector’s share of GDP¹⁰. The filing also notes favourable global factors: China, a major player in commodity chemicals, has seen lower focus on specialty chemicals because of the segment’s low-volume, high-value nature, and stricter environmental regulations introduced in 2015 have impacted its chemical manufacturing output. ¹¹ This creates an opportunity for Indian players to fill the gap.

The filing acknowledges headwinds. GST implementation from July 2017 and stricter European REACH rules affecting exports are both cited as risks. ¹² The chemical industry catering to the European market is governed under REACH — Registration, Evaluation, Authorisation and Restriction of Chemicals — which imposes compliance costs and can restrict market access for non-compliant producers.

The offer

The IPO is a fresh issue of equity shares. The specific number of shares and the price band are not disclosed in the DRHP; these will be set in a later version of the filing or in the Red Herring Prospectus.

Proceeds will be used for three purposes: capital expenditure on a new manufacturing facility at Plot 336, GIDC Waghodia, Vadodara, Gujarat; general corporate purposes; and creating a public market for the company’s shares by listing on NSE EMERGE. ¹³ The new facility represents a capacity expansion, suggesting that the company expects demand to grow beyond what its existing plants can supply.

The lead manager to the issue is Vivro Financial Services Private Limited. The registrar is Link Intime India Private Limited. ¹⁴

Financial performance

The DRHP provides restated financials for six periods: the six months ended 30 September 2017, and each full fiscal year from FY2013 to FY2017. All figures are in ₹ lakh. ¹⁵

The company reported losses in its first two reported years — PAT of ₹-27.40 lakh in FY2013 and ₹-12.17 lakh in FY2014 — but turned profitable from FY2015 onwards. ¹⁵ The turnaround is sharp: from a loss of ₹12.17 lakh in FY2014 to a profit of ₹149.58 lakh in FY2015. The filing does not explicitly attribute this to any single factor, but the pattern suggests that the company reached a scale where fixed costs were covered and operating leverage kicked in.

Profit after tax has been volatile since the turnaround. It fell from ₹149.58 lakh in FY2015 to ₹90.18 lakh in FY2016, then recovered to ₹174.82 lakh in FY2017. ¹⁵ For the six months ended September 2017, PAT was ₹132.75 lakh, which annualises to roughly ₹265 lakh, a jump over FY2017’s full-year figure, though six-month figures should not be mechanically annualised without considering seasonality.

Operating cash flow tells a more complicated story. It was positive in every full year except FY2017: ₹200.97 lakh in FY2013, ₹127.73 lakh in FY2014, ₹422.36 lakh in FY2015, and ₹802.59 lakh in FY2016. ¹⁶ Then it swung sharply negative to ₹-349.75 lakh in FY2017. This is a dramatic reversal. The filing does not explain the swing in the excerpts provided, but a negative operating cash flow in a year when the company reported positive PAT of ₹174.82 lakh means that profits were not being converted into cash, possibly because of a build-up in receivables or inventory, or because of timing differences in payments to suppliers. For the six months ended September 2017, operating cash flow recovered to ₹124.86 lakh. ¹⁶

Total assets grew from ₹2,679.38 lakh in FY2013 to ₹3,424.96 lakh by September 2017, indicating expansion. ¹⁷ The balance sheet does not disclose debt levels explicitly in the excerpts, so the company’s leverage position is unclear.

Basic earnings per share followed the same trajectory as PAT: negative in FY2013 (₹-0.45) and FY2014 (₹-0.20), then positive from FY2015 onwards — ₹2.47, ₹1.46, ₹2.43, and ₹1.48 for the six months ended September 2017. ¹⁸

Valuation and peers

Because the offer price is not specified in the DRHP, a P/E ratio or peer multiples cannot yet be computed. The EPS for the latest full financial year (FY2017) is ₹2.43 per share. ¹⁸ For the six months ended September 2017, EPS was ₹1.48. ¹⁸ When the price band is set in a later filing, the offer price divided by these EPS figures gives the implied P/E multiple.

Governance and shareholding

The company has four promoters: three individuals — Mr. Chandresh S. Parikh, Mr. Atil C. Parikh, and Mr. Rajesh C. Parikh — and the corporate entity 20 Microns Limited. ¹⁹

Collectively, the promoters hold 89,48,270 equity shares, representing 99.76% of the pre-issue paid-up capital. The promoter group (excluding promoters) holds the remaining 0.24%. ²⁰ This is an extremely concentrated ownership structure. The IPO will be the first time that shares are available to the public, and the post-issue dilution will determine how much control the promoters retain.

The company has entered into related party transactions in each of the last five financial years and the six months ended September 2017, as per Accounting Standard 18. These are detailed in the financial statements. ²¹ Given the high promoter ownership concentration and the company’s dependence on its corporate promoter for sales and marketing, related party transactions are a natural feature of the business model, but they also create the risk that transactions are not conducted at arm’s length.

The DRHP notes past instances of non-filing or delayed filing of statutory forms with the Registrar of Companies, which were later regularized with additional fees. It also states that the company has not yet obtained all required licenses for one of its manufacturing facilities — Plot 9-10, GIDC Waghodia. ²² These are compliance gaps that the company will need to address, and they expose it to potential penalties or operational disruption.

The company and its promoters are parties to certain legal proceedings. ²³

Material risks

Dependence on corporate promoter for sales. The company relies on 20 Microns Limited to market and sell its products. Termination or disruption of this arrangement would severely hurt revenue. ² This is not a theoretical risk. The company’s entire go-to-market strategy is built around this relationship, and building an alternative distribution channel would take time and money.

No long-term contracts with customers or suppliers. The company does not have long-term or definitive agreements with customers or raw material suppliers. It operates on purchase orders with customers, and has no long-term agreements with raw material suppliers, exposing it to volume and price volatility. ²⁴

Negative operating cash flow in FY2017. Operating cash flow swung from ₹802.59 lakh positive in FY2016 to ₹-349.75 lakh in FY2017. ¹⁶ Sustained negative cash flows could constrain growth and require additional financing. The recovery to positive ₹124.86 lakh in the six months ended September 2017 is encouraging, but one year of negative cash flow in a five-year track record is a data point that warrants attention.

Missing regulatory licenses. The company has not yet obtained certain statutory and regulatory approvals for its manufacturing facility at Plot 9-10, GIDC Waghodia. ²⁵ This could lead to penalties or operational disruption. The filing acknowledges that the company cannot assure that it will not be penalized for such non-compliance.

Related party transactions and promoter concentration. The company has a history of related party transactions and may continue them. There is no assurance that these will not have an adverse effect on financial condition, given the high promoter ownership concentration. ²⁶ With promoters holding 99.76% of pre-issue equity, minority shareholders will have limited ability to influence governance or challenge related party dealings.