20 Microns Nano Minerals: inside the DRHP

20 Microns Nano Minerals is a small specialty-chemicals company asking the public market for money. It does its selling through a long-term arrangement with its corporate promoter, which markets and sells the company’s products through its own network.¹ It processes minerals into specialty chemicals.¹ The company is tightly held by a family and a corporate parent,² and it is seeking a listing on the SME Platform of NSE.³

The filing that describes all this is the Draft Red Herring Prospectus (DRHP), the document a company must file with the market regulator before it can sell shares to the public. Everything in this report comes from that document. The DRHP does not disclose the issue size, the price band, or whether any existing shareholder plans to sell shares in the offer; those details will come later, in the final prospectus. What the filing does disclose is the business, the ownership, the use of the money raised, six periods of restated financial statements, and a long list of risks the company concedes. This report walks through each.

What the company does

This is a processing business. 20 Microns Nano Minerals takes minerals and turns them into specialty chemicals. The DRHP describes the company as “engaged in processing and selling of a wide range of Specialty Chemicals,” and groups its products into four buckets: Functional Additives (FA), Chemically Modified Minerals (CMM), Soft Minerals (SM), and Hard Minerals (HM).¹ The DRHP lists FA and CMM as the products the company says it is “primarily” engaged in, and says it is “also engaged in” SM and HM.¹ A functional additive, for instance, might be a fine mineral powder that gives a paint its matte finish or a plastic its stiffness.

What makes the model unusual is the sales channel. The company has a long-term arrangement with its corporate promoter to market and sell its products through that company’s network.¹ The DRHP lists “support of our holding company” among its competitive strengths, and says the company derives “substantial synergies” from 20 Microns Limited.⁴ For the reader, this means the company’s revenue depends on a related party’s distribution muscle. That structure works well when the parent is healthy and aligned, and creates a concentration risk if it is not.

The customer base is narrow. In FY15, FY16, and FY17, the top 10 customers accounted for around 59%, 57%, and 59% of revenue from operations, respectively.⁵ That is a high concentration by any standard: losing one large customer is visible in the next quarter’s numbers. The company’s own risk section concedes the point. It has no long-term or definitive agreements with customers and instead relies on purchase orders to govern volume, pricing, and terms.⁶ A purchase order is a one-off instruction to supply; it can be cancelled, reduced, or not renewed. The filing’s own words: “We have not entered into any long term or definitive agreements with our customers.”⁶

Exports are a small part of the story. Over the past five years, the company achieved total exports of ₹10.68 crore, to just three countries: Nigeria, Saudi Arabia, and Sri Lanka.⁵ The DRHP does not break out export revenue by year, only the five-year cumulative figure. The same concentration applies here: a small number of relationships carries the whole export book.

The company’s own list of strengths, as stated in the DRHP, is a diversified product portfolio, diversified user industries, import substitution, support of the holding company, product innovation and continuous R&D, and a strong management team.⁷ The first two are related: a diversified product portfolio sold across diversified user industries means no single end-market dominates.⁴ The import-substitution claim is a bet on Indian manufacturers replacing imported chemicals with domestic ones. The DRHP’s industry section develops this theme at length.

Industry and market

The sector context matters here because the company’s growth story is about the industry growing, not about the company taking share. Specialty chemicals sit inside the broader Indian chemicals industry. The DRHP, citing CRISIL Research, estimates the Indian chemicals industry (excluding pharmaceuticals and fertilisers) at ₹5.8–6.2 lakh crore in FY17, with specialty chemicals (excluding agrochemicals and dyestuff) accounting for about 17% of that, roughly ₹1 lakh crore.⁸ A separate estimate in the filing puts the specialty chemicals segment at ₹1,44,300 crore.⁹ The two numbers are not reconciled in the filing; they come from different sources and different definitions. What both agree on is that the segment is large and growing: the DRHP says specialty chemicals grew at 10–12% CAGR from fiscal 2014 to 2017, and CRISIL forecasts 12–14% CAGR.⁹

The growth is broad-based. The DRHP lists sub-segment forecasts: polymer additives at 10% CAGR, construction chemicals at 15%, water chemicals at 15%, personal care ingredients at 15%, textiles at 12%, surfactants at 13%, and flavours and fragrances at 12%.⁹ The downstream demand that matters to this company is in paints (an estimated ₹40,100 crore market in FY17) and organised cosmetics and toiletries, estimated at ₹43,000–46,000 crore.¹⁰ Polymer and plastic-product demand is expected to grow at 9–10% and 11–13% CAGRs respectively between fiscals 2017 and 2020.¹¹ These are the end-markets into which the company’s functional additives and modified minerals flow.

The competitive structure is the fact to notice. The industry is highly fragmented: SMEs hold 70–75% market share, and only a few Indian players have the scale or capability to compete with global giants on product development and innovation.¹² For a small processor like 20 Microns Nano Minerals, this cuts both ways. Fragmentation means no single domestic player dominates; it also means the company is one of many small firms competing on price in a market where the biggest, most sophisticated customers may prefer global suppliers.

The DRHP leans on two tailwinds. First, import substitution: chemicals imports have grown at 6.4% CAGR versus 6% for exports, meaning Indian buyers are increasingly sourcing from abroad. The domestic industry’s opportunity is to replace those imports.⁸ Second, China’s stricter environmental regulations, introduced in 2015, have constrained its chemical manufacturing output.¹³ The policy backdrop is supportive: a Draft National Chemical Policy aims to raise the chemicals sector’s share of GDP, FDI of up to 100% is allowed, four Petroleum, Chemicals and Petrochemicals Investment Regions (PCPIRs) have been approved, and GST came into effect on July 1, 2017.¹⁴

None of this is a forecast for this company. It is the industry context the DRHP itself provides. This is the market the company hopes to grow into.

The offer and what the money is for

This is an SME IPO. The DRHP states that the shares will be listed on the SME Platform of NSE, called NSE EMERGE.³ The lead manager is Vivro Financial Services Private Limited, and the registrar is Link Intime India Private Limited.¹⁵

The stated objects of the issue, as listed in the DRHP, are three. First, to fund capital expenditure for setting up a new manufacturing facility at Plot 336, GIDC Waghodia, Vadodara, Gujarat.³ Second, general corporate purposes.³ Third, creating a public trading market for the equity shares by listing them on NSE EMERGE, to enhance the company’s visibility and brand.³ That third object is not a use of money; it is a statement of why the company wants to be public at all. A listing gives existing shareholders a liquid market for their shares and gives the company a public profile. The DRHP does not quantify how much of the proceeds will go to the factory versus general corporate purposes.

What the DRHP does not disclose is as important as what it does. The issue size is not stated. The split between a fresh issue (new shares sold by the company, with the money going to the company) and an offer for sale (existing shares sold by current holders, with the money going to them) is not stated. The price band is not stated. No selling shareholder is named. None of these details appears in the DRHP material available for this report. The reader should know that the company is raising money for a factory and for general purposes, but the quantum and the structure of the raise are not yet public.

Six periods of restated financials

The DRHP restates six periods: the six months ended September 30, 2017, and the five fiscal years ended March 31, 2017, 2016, 2015, 2014, and 2013.¹⁶ “Restated” means the numbers have been adjusted to a common accounting basis so that all six periods are comparable. The figures below are in ₹ crore, converted from the lakh figures in the filing (₹1 lakh = ₹0.01 crore).

Sources: PAT and periods from the Restated Summary Statement of Profit and Loss;¹⁶ operating cash flow from the Restated Summary Cash Flow Statement;¹⁷ total assets from the Restated Summary Statement of Assets and Liabilities;¹⁸ EPS from the ratios annexure.¹⁹

The profit story is a turnaround. The company lost ₹0.27 crore in FY13 and ₹0.12 crore in FY14, then turned profitable: ₹1.50 crore in FY15, ₹0.90 crore in FY16, ₹1.75 crore in FY17, and ₹1.33 crore in the first half of FY18.¹⁶ The FY18 half-year profit is already 76% of the full FY17 figure (₹1.33 crore against ₹1.75 crore¹⁶), which suggests the year is on track to beat the previous one. The DRHP does not say this, and a half-year is not a full year. The EPS numbers track the same arc: negative in FY13 and FY14, positive from FY15 onward, at ₹2.43 for FY17 and ₹1.48 for the first half of FY18.¹⁹

The cash flow story is more complicated, and it is where the filing’s own risk warnings start to make sense. Operating cash flow was positive in FY13 through FY16 (₹2.01 crore, ₹1.28 crore, ₹4.22 crore, and ₹8.03 crore respectively), then turned sharply negative in FY17 at ₹3.50 crore, before recovering to ₹1.25 crore in the first half of FY18.¹⁷ The FY17 swing is the striking number: the company booked a ₹1.75 crore profit but generated ₹3.50 crore of negative operating cash flow. Profit is an accounting measure; cash flow is what actually moved through the bank account. A profitable year with negative operating cash flow usually means the company’s working capital (money tied up in inventory or receivables) absorbed the cash. The DRHP flags this directly, listing negative cash flows in previous financial years as a risk factor.²⁰

Total assets tell a story of a company that shrank before it grew. Assets stood at ₹30.19 crore at FY13, dipped to ₹25.93 crore by FY15, then rose steadily to ₹34.25 crore by September 30, 2017.¹⁸ The dip and recovery track the profit turnaround: the company was smaller when it was losing money, and has been rebuilding its balance sheet since.

Two balance-sheet items deserve attention. Contingent liabilities (obligations that may or may not materialise, such as a disputed tax demand or a bank guarantee) stood at ₹29.11 lakh as at September 30, 2017.²¹ That is a small number relative to assets, but the filing also notes that unsecured loans taken by the company, its promoters, or group companies can be recalled by lenders at any time.²² Unsecured loans have no collateral backing them; the lender can demand repayment on short notice. If a lender calls in a loan, the company must find the cash or refinance, which can strain operations.

The DRHP’s restated financials do not disclose revenue from operations, EBITDA, or net debt in the extracted facts. The full Restated Profit and Loss and Balance Sheet on pages 49 and 175 would contain those lines, but they are not in the fact set available for this report. What the available numbers show is a small, recently profitable company with lumpy cash flow and a balance sheet that is growing again.

Ownership and governance

Ownership is the governance story. The promoter group is led by 20 Microns Limited and three individuals: Chandresh S. Parikh and Atil C. Parikh,²³ and Rajesh C. Parikh.²⁴ Pre-issue, the promoters hold 89,48,270 equity shares, or 99.76% of paid-up capital;²³ the rest of the promoter group holds 21,510 shares, or 0.24%.²⁵ That is effectively a wholly owned company going public. After the issue, the promoters’ stake will be diluted by whatever portion of the issue is a fresh issue of new shares, but the DRHP does not disclose the issue size, so the post-issue holding cannot be computed.

Sources: promoter holding from page 155;²³ promoter group holding from page 162.²⁵

The capital structure is small. Issued, subscribed, and paid-up capital as at September 30, 2017 was ₹897 lakh (89,70,000 equity shares of ₹10 each) against authorised capital of ₹2,000 lakh.²⁶ Authorised capital is the ceiling the company can issue without amending its charter; the company has room to issue more shares, which is what a fresh issue would do.

Related-party transactions are structural, not incidental. The DRHP discloses them for the last five financial years and the six months to September 30, 2017, under Accounting Standard 18,²⁷ and warns that the company may continue to enter into them.²² The central related-party relationship is the sales arrangement with 20 Microns Limited, the corporate promoter that is also the distribution channel.²⁸ The DRHP’s risk section states plainly: “Our Company has in the past entered into related party transactions and may continue to do so in the future,” and concedes there is no assurance these transactions will not adversely affect the company’s financial condition.²²

The filing also concedes operational and compliance gaps. The company does not own the premises of two manufacturing facilities (Plot 347, GIDC Waghodia, Vadodara, Gujarat, and Plot 104/3, Thenkasi Road, Pathur Village, Alangulam, Tirunelveli, Tamil Nadu) nor its administrative offices in Bhuj and Udaipur.²⁹ It operates on leased or licensed land. Separately, the DRHP discloses that in the past there have been instances of non-filings, incorrect filings, or delays in filing statutory forms with the Registrar of Companies, some of which were subsequently filed with additional fees.³⁰ Neither of these is fatal by itself; both are the kind of disclosure that tells a reader the company’s house is not perfectly in order.

The extracted facts contain no particulars of litigation, auditor qualifications, or regulatory penalties. The DRHP does state that the company, its promoters, its group company, and its directors are parties to certain legal proceedings, and that an adverse decision could have a material adverse effect.³¹ But the names, amounts, and case status are not in the available fact set. That absence is a gap in this report, not a clean bill of health.

Five risks the DRHP itself concedes

The DRHP’s risk factors run to 60 numbered items.³² Most are boilerplate: the kind of “market conditions may affect our business” language that appears in every prospectus. Five are specific enough to this company to matter.

Customer concentration with no contracts. The top 10 customers accounted for around 59%, 57%, and 59% of revenue from operations in FY15, FY16, and FY17 respectively,⁵ and the company has no long-term or definitive agreements with any of them. Sales run on purchase orders.⁶ A purchase order can be cancelled or not renewed. Losing one top-10 customer is a visible revenue hit.

Distribution depends on a related party. Products are marketed and sold through the corporate promoter’s network.¹ The DRHP names that corporate promoter as 20 Microns Limited.⁴ The company’s own strength list calls this “support of our holding company,”⁴ but it is also a dependency: if that arrangement breaks down or is renegotiated on worse terms, the sales channel is directly affected.

Borrowed land and missing licences. The company does not own the premises of two manufacturing facilities and its administrative offices.²⁹ At its Plot 9–10, GIDC Waghodia facility, it has not yet obtained certain statutory and regulatory licences, registrations, and approvals required to operate, and cannot assure it will not be penalised for non-compliance.³³ A lease can expire or be terminated; a missing licence can attract penalties or, in the worst case, shut down the facility.

Cash flow can turn negative in a profitable year. FY17 produced ₹1.75 crore of profit¹⁶ but ₹3.50 crore of negative operating cash flow.¹⁷ The DRHP itself flags negative cash flows in previous years as a risk.²⁰ A company can be profitable on paper and still run short of cash if working capital (inventory and receivables) absorbs it.

Related-party and promoter concentration are interlocked. Related-party transactions have occurred over the last five financial years²⁷ and may continue,²² and promoters control 99.76% of the pre-issue equity.²³ Minority investors are buying into a company where the corporate promoter controls the distribution channel.¹ The DRHP concedes there is no assurance such transactions will not adversely affect the company.²²

None of this is a recommendation to avoid the issue. It is what the company’s own filing says about itself. The DRHP is a disclosure document, and these are the disclosures the company chose to make. A reader deciding whether this IPO is worth attention has, in these five risks, the material facts: a small company, a narrow customer base, a related-party sales channel, some regulatory gaps, and cash flow that does not always follow profit.