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Chemcel Bio-Tech Products Limited IPO Risk Factors

Chemcel Bio-Tech Products Information :

1. The Bio Diesel project is the first of its kind in India and the sustainability of the product, the technology for manufacture has not yet been proven. Even though the Product and Technology is first of its kind in India, it has already been proven in other countries such as USA, France, Germany, Italy etc. Also, as part of a pilot project of Indian Railways, Shatabdi Express successfully used bio diesel as a fuel for the trial run from Delhi to Amritsar. The Andhra Pradesh Pollution Control Board has recommended the usage of bio diesel in diesel engines as it is an eco friendly fuel and reduces pollution. Ministry of Petroleum & Natural gas also recommended usage of bio diesel in vehicles and for this purpose, it has established bio diesel purchase centre through out the country.

2. The project is significantly dependent on adequate and timely availability of Jatropha seeds, the extracts of which are used for the production of Bio Diesel. Non-availability or short supply of these seeds would adversely affect the business of the Company. Also, the availability of this agricultural produce could be affected by various natural factors such as inadequacy of rainfall, attacks from pests, natural calamities such as droughts or floods, non-availability of water, etc. The Project requires approximately 6,000 tonnes of seed per annum based on the installed capacity, which is adequately available in Andhra Pradesh, Chhattisgarh, Tamilnadu, Gujarat & Maharastra. Consequently, the Company does not envisage any difficulty in procurement of the requisite raw material. In addition to this, after a period of 36 months, the company is expected to have the output of seeds from its own plantation of 2000 acres. Hence, the situation of nonavailability of seeds may not arise.

3. The off take of Bio Diesel is dependent upon the Company supplying the Bio Diesel at prices lower than the retail price of Petroleum based Diesel. Petroleum based Diesel is presently at existing high price levels due to high excise levies. In the event that the excise duty levied on Petroleum based diesel is reduced below the price of Bio-Diesel, the Company may be unable to find buyers to sell the product, which would adversely affect the sustainability of the project.

4. Jatropha Curcas cultivation involving raising plants in nurseries, planting and maintaining them and collection of seeds are labour intensive activities. Inadequate availability of manpower might pose a problem.

5. The Company is yet to enter into Sale Deeds for the Land required for Plantation. The Company has entered into Agreement for Sale with various parties for purchase of Land admeasuring an area of Acres 801.17 cents for which the Company is yet to get the said land registered in its name.

6. The Product is first of its kind, the marketability of the product is to be established, and the Company is yet to derive revenue from its sales. As per the recently released Bio diesel policy guidelines, the entire production can be sold to Indian Oil Corporation. Hence, the question of marketability does not arise.

Other risk factors

1. The sources of the company’s business is highly dependent upon its ability to
implement its growth strategies.
The Company’s ability to sustain its growth depends, to a large extent , on its ability.
???? To augment financial resources for additional capacities at competitive terms and
conditions;
???? To complete capacity expansion / new projects without time and cost overrun;
???? To retain and motivate key management personnel;
???? To design and implement strong internal control system; and
???? To control costs
The Company’s inability to efficiently handle the above mentioned challenges may hurt its
business prospects, results of operations and financial condition.
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4 . Low Promoter holding
The Promoters and the Promoter`s group are expected to hold 29.08% of the post-issue paid up capital of the company.

5 . There has been a delay in the implementation of the proposed bio diesel project. The project was earlier stated for commencement of commercial production in October 2005, however, due to the delay, the commercial production would now commence in October 2006. Due to delay in commencement of commercial production, the profitability of the Company would be adversely affected.

6. Non-receipt of Government and other regulatory approvals may affect the completion of the proposed project that forms part of the objects of the issue. The Company is yet to make an application for Central Excise registration for bio-diesel manufacturing. Explosive license can be obtained after installation of the machinery and inspection by the concerned authorities.

7. Critical Risk Factors
Critical Risk Factors as per the Techno-economic feasibility report by Union Bank of India for Agro-Chemical activities and Bio-diesel activities are as under:-
Agro-Chemical activities:-
Threats:
i. Failure of evenly distributed and consistent monsoon in any year would have its adverse effect on agrobased industry, though its impact would be less on CBL’s working, its business area being Krishna & Godavari districts with well spread irrigation facilities.
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Weakness
i. The fortunes of Agro chemical Industry are influenced and closely linked to the growth and development of overall agricultural sector, which in turn is dependent on monsoons.
ii. Industry has so many entry barriers including the need for wide distribution network,
strong brand image and superior product. The increased awareness of environment protection makes prior registration mandatory for large number of products.
iii. Agro chemical industry requires high working capital due to its seasonal nature and long credit period given to farmers. Thus, high inventories during off-season period and high receivables during poor monsoon put further pressure on working capital requirement.
iv. Heavy dependence on cash crops and in particular regions will increase the risk, particularly when those crops fail.
Bio-Diesel activities:-
Weaknesses
i. Long gestation period to be self supportive in getting captive supply of seeds from own plantation.
ii. Huge investment in waste land for plantation, for raw material requirement of even small capacity of processing unit.

8. The Company has not made any definitive arrangements for the procurement of some of the equipment/machinery/fixed assets for the project, which may cause delay in implementation of the project. The process of issuing confirmation to the suppliers for the supply of equipments have been held up due to the company not having released any advances to the suppliers. Because of delay in payment of advances to suppliers, the delivery of the equipment/materials may get delayed in turn causing further delay in project implementation. By not finalizing terms with some of the vendors, the company may also be faced with situation of seeking new vendors/suppliers where negotiations and discussions need to be started afresh. As a result, the project implementation may be significantly effected in terms of delays.

9. The Company is dependent on external suppliers for key materials for manufacture of bio-diesel. The company is dependent on external suppliers for supply of Jatropha Seeds, main raw material for extraction /production of bio-diesel. The failure of the supplier to deliver the raw material in the necessary quantities or to adhere to delivery schedules or specified quality standards, could adversely affect its business and its ability to deliver on time and at the desired level of quality giving rise to contractual penalties or liability, for failure to perform contracts, and loss of customers and damage Company’s reputation, any of which could materially adversely affect its results of operations. Further, if the costs of Jatropha seeds were to rise due to factors such as rises in input and commodity prices or shortages in supply, and the Company is not able to recover these costs through cost saving measures elsewhere or by increasing the prices of bio-diesel, its results of operations could be adversely affected. As such, should cost of materials rise, the Company can provide no assurance that it will be able to pass on any additional costs to its customers, and accordingly its results of operations could suffer.

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10. The Company proposes to rely on contract labour for the performance of many of its plantation activities. The Company proposes to rely on contractors who engage on-site labourers for performance of many of its unskilled operations. The Company is yet to get itself registered as a principal employer under the Contract Labour (Regulation and Abolition) Act. Non receipt of this
registration may adversely affect the Company’s ability to employ contract labour and its operations. Further, on an application made by the contract labourers, the appropriate court/tribunal may direct that the contract labourers are required to be regularized or absorbed, and/or that the Company pay certain contributions in this regard.

11. The Company is promoted by first generation entrepreneurs having no prior experience in Bio diesel business, which is unrelated to the present business activities of the company; the investors will be subjected to all consequential risk associated with such ventures.

12. The proposed expansion project is mainly funded by the Public Issue. Any delay in raising the funds from IPO may have an adverse impact on the future performance of the Company. Delays in raising funds are likely to have an impact on the growth plans of the company in the short run due to delayed deployment of funds. Due to such delays, it is likely that the company
may have to renegotiate with some of the suppliers and in some cases even settle for alternate suppliers for key equipment. Such processes can delay the project thereby affecting the future performance of the company. The performance projections are prepared based on timely raising of funds and hence the delay in IPO can effect future performance of the company.

13. Future Equity Offerings
The Company may require further infusion of funds to satisfy it`s capital needs and future growth plans, which the Company may not be able to procure. Any future equity offerings by the Company may lead to dilution of equity and may affect the market price of the Equity shares.

Tags : bio diesel, Chemcel Bio-Tech, Chemcel Products Limited, jatropha seeds , 133 Views

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