In today’s Finshots, we’re diving deep into the ongoing IPO of Stallion India Fluorochemicals Limited.

The Story

Last year was one of the warmest years for India. And it's times like these when we often run for the chill of an ice cream from the freezer or the cool breeze from air conditioners on a scorching summer day. But ever wondered how these things actually work? After all, they're not pulling some chill from a magic tunnel. These everyday comforts owe their existence to fluorochemicals which are invisible yet essential compounds that keep our lives cool and running smoothly. 

Take an A/C, for example. Inside, fluorochemicals circulate in a loop. First, they absorb the heat from your room, turning into a gas. Then, they release this heat outside as they return to liquid form, creating a cooling effect indoors. In fridges, they do the same thing—pulling heat out to keep your food fresh. But fluorochemicals don’t stop at cooling. They’re the quiet enablers in semiconductor manufacturing, ensuring each microchip’s precise structure by cleaning and etching surfaces at the molecular level. And in healthcare, fluorochemicals are something that drive complex chemical reactions, helping synthesize critical compounds in life-saving drugs.

So, from keeping your ice cream frozen to powering cutting-edge tech and medicine, we could say that fluorochemicals are the unseen backbone of the modern day. And this is the industry that Stallion India Fluorochemicals operates in.

The company was founded in 2002 and it specializes in selling refrigerants, industrial gases, and related products. It has four manufacturing plants across India—in Maharashtra, Rajasthan, and Haryana—and caters to industries ranging from semiconductors to pharmaceuticals. What are its core operations? Well, it debulks, blends, and processes refrigerants and industrial gases, alongside the sale of pre-filled containers and cylinders. In simpler terms, Stallion takes large quantities of refrigerants and industrial gases, breaks them down into manageable portions, mixes them for specific needs, and processes them for use in various industries. For instance, these processed gases might end up in cooling systems for air conditioners or refrigeration units, or be sold in pre-filled containers to factories for industrial use.

Now, as per the company prospectus, Stallion’s versatility lies in its ability to serve high-growth industries while maintaining operational efficiency. The company’s deep understanding of the fluorochemicals sector and its established presence in the market provide a competitive edge.

Let's go over some details of the IPO that’s set to close on January 20, 2025. It comes with a price band of ₹85-90 per share, and has a total size of ₹199.45 crores. This includes a fresh issue of 1.79 crore shares worth ₹160.73 crore and an offer for sale (OFS) of 0.43 crore shares totaling ₹38.72 crores.

And why is the company raising these funds? Well, the proceeds from the fresh issue are said to be used to fund working capital requirements. Plus, it wants to develop a semiconductor and specialty gas debulking and blending facility in Maharashtra as well as establish a refrigerant debulking and blending facility in Andhra Pradesh.

Now, the fluorochemicals industry is quite a complex market.

But what works in Stallion’s favor is that it has leveraged its 20 years of experience to establish a firm foothold in the industry. This longevity and expertise have enabled the company to carve out a distinct niche in a high entry barrier yet a significantly growing market. You see, the high entry barriers here arise from the need for specialized technology, infrastructure, and regulatory compliance. And it's some of these things that protect Stallion from a flood of new competitors and help reinforce its position.

Then, we should also credit Stallion for its operational versatility. Because it caters to high-growth sectors such as electronics (majorly A/Cs), automotive, and healthcare, Stallion has reduced its reliance on any single industry. This diversification minimizes operational risks and provides a steady growth trajectory. And Stallion’s return on net worth (RoNW) of about 12% outpaces several industry peers, underlining its operational efficiency and ability to create shareholder value.

Now while Stallion India Fluorochemicals has many positives, investors need to be aware of the risks as well.

You see, a significant portion of the company’s revenue is seasonal, peaking between February and May, which could lead to uneven cash flows throughout the year.

Plus, its heavy reliance on a single product category that is refrigerants and industrial gases makes Stallion vulnerable to market fluctuations or any potential declining demand. And it doesn't have any long-term contracts with raw material suppliers, which throws in another uncertainty in maintaining stable costs under check during high fluctuation periods. And the absence of any long-term agreements with customers to purchase or place orders with it could also affect the cash flows.

Even keeping the numbers aside, compliance with stringent environmental and safety standards could pose a challenge. Because Stallion operates in a highly regulated industry and any failure to meet these regulations could result in financial penalties or mean a blow to its reputation. You see, the use of advanced technologies in production and purification, while crucial for quality, makes operations more complex and susceptible to disruptions in this space.

But let's keep these risks aside for a bit and what we have is the financials of the company which reveal a mixed bag. The company’s revenues rose from ₹18,588 lakhs in FY22 to ₹23,623 lakhs in FY24, marking steady growth. But profits dipped from ₹2,111 lakhs to ₹1,479 lakhs during the same time. And while year-over-year revenue growth was a strong 21% in FY23, it slowed to just 5% in FY24.

Nevertheless, Stallion operates on a smaller scale compared to competitors like SRF and Gujarat Fluorochemicals. But its return on net worth stays competitive. And this is because of its operational efficiency, which hints at a potential for growth.

So where does all of that leave us?

You see, the fluorochemicals market in India was valued at around $622 million in 2022. And as per the prospectus, it is said to grow at a CAGR of 16-18% from 2024 to 2029. This growth is being led by the rising growth of various sectors such as electronics, healthcare and manufacturing through various initiatives. But still, the industry faces hiccups such as stringent environmental regulations, high capital expenditure requirements, and technological barriers that limit new entrants. And it’s these dynamics that create a high-entry-barrier, high-reward market for players like Stallion India Fluorochemicals. But one should weigh the risks such as revenue concentration and also the company’s dependency on imported raw materials.

After all, Stallion’s ability to execute its growth plans and navigate industry challenges will determine its long-term value for shareholders. And the performance in leveraging these opportunities will be something critical to watch out for.

Until next time…

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