SPEB Adhesives Ltd IPO Analysis

A quick-fix adhesive, something every Indian household reaches for when something breaks. With countless options already in the market, here is a rising player raising funds to strengthen its presence and become a part of our everyday repairs.

Let’s explore this new adhesive product by SPEB Adhesives Ltd further:

(The SPEB Adhesive Ltd Share Price will be finalised post-allotment, while grey market cues through the SPEB Adhesive Ltd IPO GMP will likely reflect market sentiment closer to listing.)

The Indian Adhesive market size, in 2024, was valued at $2.87 billion. With a growth of 6.98% CAGR, it is expected to reach $3.76 billion. Apart from this, the packaging industry, which is the largest end-user segment for the adhesive market, is expected to grow with a 22-25% CAGR.

The major growth driver for the industry involves a rising middle-class population, improvement of the supply chain, and emerging e-commerce activities. The adhesive solution is extensively used in flexible and rigid packaging applications.

Adhesive-based bonding solutions are also extensively used in the automotive sector, which traditionally used mechanical fasteners. 

Origin of SPEB Adhesives Ltd.

Incorporated in Maharashtra in 1990, by Harshad Vithlani, SPEB Adhesives Ltd deals in the manufacturing and sale of adhesive products under the synthetic rubber-based category. The company is also engaged in contract manufacturing for water-based adhesives.

Within the solvent category, the company specializes in polychloroprene-based and SBS-based adhesives.

The company's product portfolio includes various customized adhesives for industrial and retail applications. SPEB follows a B2B distribution model, with products primarily used in hardware, foam, furnishing, ducting, and insulation.

Business Model

Here is the brief explanation of an integrated business model followed by SPEB:

Raw Material: The company procures material such as polymers, resins, and other chemicals from selected suppliers on the basis of demand and relationship. 

Manufacturing: SPEB is involved in an in-house manufacturing process where inputs are carried out through controlled mixing and a formulation process in order to meet diversified industry needs. 

Quality control: An in-house quality control laboratory is present, where the product batches are tested for strength, performance, and safety before final dispatch.

Sales & distribution: The Company is primarily in dealer distribution sales, around 80%. It also supplies directly to industry and its government clients.

The company has maintained its concentration on the buyer and supplier side. It can be observed that the company is fairly concentrated in terms of its customer and supplier base. 

With around 22.21% of its revenue coming from its top 5 customers, SPEB does not carry a risk in terms of dependency of its top line on a few customers.

Similarly, on the supplier side, Astron is fairly concentrated. Over the years, it can be observed that the company is moving in the right direction of making both its supplier & buyer concentration at the right level.

Product Portfolio

SPEB Adhesive is primarily driven by the hardware segment, with nearly 80% of the revenue being generated. The primary product used here is the ‘SPEB-7’ range. The stability in terms of revenue for this segment shows the company’s consistent effort towards this category.

Beyond hardware, the company has meaningful exposure to the foam and furnishing industry, contributing to around 12%-13% annually. Spray-based products are generally what is used here, which require more specialised adhesive properties.

SPEB also makes footwear-grade adhesives (1%+ revenue), supplied to small and medium footwear manufacturers and repair clusters for bonding leather, PU, and PVC soles and uppers.  

Overall, it can also be observed that the company has been maintaining constant revenue contribution from other segments as well, such as general set, woodworking, etc. 

At its Raigad facility in Maharashtra, the company has a total installed capacity of 12,000 litres per day. Utilised capacity (%) is currently in an uptrend from 46% in FY22 to 62% in FY24. 

The company has sufficient manufacturing capacity in terms of its current utilisation. It must also be noted that SPEB is raising funds for setting up a manufacturing plant for its water-based adhesive. 

Apart from that, a favourable range of capacity utilisation shows that the company has more room for growth and does not require incurring heavy capex in the coming years

Management & Governance

The promoters of the company are from the Vithlani family, comprising 8 directors, out of which 4 are independent.

The governance ensures quality as the audit and remuneration committee is led by independent directors.

The promoter’s holding Pre-IPO was 99.76% and Post IPO will be around 70%. Thus, keeping the control in their hands to lead the company towards growth with their decisions.

Financial Performance

With the revenue rising from 3837.16Cr in FY22 to 4261.64 Cr in FY24, SPEB Adhesive Ltd showcases a 2-year CAGR of 23% CAGR from FY22 to FY24 along with margin stability. The EBITDA margins have been more or less stable, while the PAT margins have shown improvement. 

The return on equity (ROE) is in an uptrend on account of an increase in net profit. The company has witnessed a positive return on capital employed (ROCE) trend due to a simultaneous increase in profit and no debt. 

However, it must be noted that the surge in SPEB’s revenue is not backed by an increase in trade receivables, which has shown lesser growth when compared to sales.

Overall, it can be said that the company has a decent quality of balance sheet, with high sales and profit growth, but a concerning volatility in margins.

At first glance, the company seems to be undervalued in terms of PE ratio. While the EV/EBITDA ratio stands at 16x relative to peers. 

However, on further analysis, it was found that the company has a higher % of other income, leading to a lower P/E. In a nutshell, we can say that the company is valued at a higher range than its peers. 

The company is completely debt-free. The peer group also carries less debt in its financials.

SPEB Adhesive is demonstrating performance with its margins in a fair range in comparison to the industrial standard. The current EBITDA margin is 15.53% while the PAT margin is around 11.5%. 

The ROE stands at 16.8% & ROCE is 21.15%, which are also on the higher side in comparison to the peer group. 

IPO Objectives

• Capex Expansion: Funding expenditure required to increase its plant and machinery base.

• General Corporate Purpose: Required for administrative and operational-related expenses.

The company aims to raise funds to expand its production and inventory base. The funds will be used for establishing a new manufacturing facility for water-based adhesive at Raigad, Maharashtra. 

Till now, the company has been outsourcing its Water-based products like FlooRBonD Adhesive, Wallfix Adhesive, and Aqua-7 Adhesive. The in-house manufacturing of water-based adhesive will also lead to expansion in margins, as claimed by the management. 

Overall, it can be said that the money is being used for the company’s primary purpose of manufacturing and expanding its core business.

Strength and Risk

Final Words

At Alpha Venture X Fund, we assess opportunities through our LMVT framework — Leadership, Moat, Valuation, and Tailwinds — enabling us to identify scalable businesses with durable fundamentals. 

Leadership: Primarily led by the Vithlani family with a combined experience of 110+ years. The long-term distribution and supplier relations maintained, along with the expansionary vision,n indicate reliability.

Moat: Regional distribution advantage, Strong recall of ‘SPEB-7’ and related SKUs among hardware and furniture users, and being a debt-free business provides a competitive advantage to the company. 

Tailwinds: Favourable raw material (synthetic rubber) price from FY23 peak, higher margins from upcoming in-house to water-based adhesive manufacturing, and potential for growth in exports.

Valuation: Company is slightly overvalued at a PE & EV/EBITDA of 17.2x & 16.1x, respectively. While the median PE & EV/EBITDA ratio for peers stands at 19.2 & 13.1, respectively. 

Conclusion: 

• With good fundamentals, the company is well placed in the niche market of providing synthetic adhesive solutions to the hardware and furniture segment. 

• Despite the presence of large competitors, it would be worth monitoring how SPEB leverages its strong distribution network in the Maharashtra region and effectively expands its water-based adhesive manufacturing.

• Given the SME risk, SPEB is a selective buy depending on the management’s effective execution of the expansion plan in its niche market, leading to value creation for its shareholders.