Verdict: Not Attractive on any count

IPO Snapshot

Heranba is launching a Rs. 625 crore IPO between Tue 23rd Feb 2021 to Thur 25th Feb, in the price band of Rs. 626-627 per share. 90% of the issue is offer for sale (OFS) by promoters and only 10% is fresh issue for working capital. Issue represents 25% of post-issue capital and will list on 5th March.

Poor Corporate Governance for the Crop Protection Company

Besides 500+ criminal proceedings underway against the company, in May 2011 promoters had received administrative warning from SEBI for trades done in a listed stock. Between June 2016 to Dec 2017, promoter and group company were also classified ‘willful defaulter’ for Rs. 49 crore co-operative bank loan. During FY19, company received unit closure order from Gujarat Pollution Control Board for mishandling and non-permission for sale, which was later resolved. At present, Heranba has given Rs. 75 crore guarantee and provided Rs. 32 crore security for group company’s loan, which is in turn used to clear loans of group companies etc. Thus, past history of inter-corporate dealings raises many red flags. 90% of such a large fund raise being OFS and only 10% fresh issue also indicates urgency at promoter end.

Weak H2FY21 Outlook

FY20 revenue contracted 5% YoY to Rs. 951 crore with half being exports. China, world’s largest pyrethroids consumer, accounted for 15% of company sales, which may face geo-political uncertainties. 22% sales is domestic branded formulations business, where margins are the most attractive and which experience higher demand during kharif season (between Jun-Nov). Thus, while H1FY21 revenue grew 23% YoY to Rs. 618 crore, H2 performance may not be as encouraging. Also, most domestic agro chemical companies has reported soft performance QoQ for Q3FY21 due to unseasonal rains, especially in South India, where Heranba has sizeable presence, with 36% of its distributors. Also, insecticide demand in particular was impacted in Q3 on lower pest infection in the country. While current RoE of 30% is healthy, it will decline to closer to ~22% post dilution, in line with peers. 

Unattractive Valuation on Peer Comparison

At Rs. 627, company’s market cap will be Rs.2,500 crore. Considering seasonal factors, estimated FY21 EPS of Rs. 34 discounts the IPO price by a PE multiple of 18x, on current year earnings, which is stretched on peer comparison. Dhanuka Agri with 75%/12% promoter/institutional holding clocked Rs. 1,400 crore and 15% net margin for H1FY21, much higher than Heranba’s 11%. Dhanuka’s H1FY21 revenue/ EPS grew 31%/63% YoY as against only 23%/ 25% for Heranba respectively. Since Dhanuka is trading at FY21E PE of 18x, Heranba’s pricing is unattractive both on growth rates and margin front.

Other larger peers are also ruling at lower valuations like Coromandel International (PE of 15x), India’s largest agro chem co UPL (16x), Tata group’s cash rich Rallis (17x) despite larger size, higher margins and pedigree promoters.

Conclusion:

Patchy corporate governance track record, weak short term outlook and unattractive valuation make Heranba’s IPO best avoided. Instead look for better opportunities in the listed space, many covered by us in the Member Zone.

Grey Market Premium (GMP) of Heranba: Grey Market Premium of Heranba is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.

Disclosure: No Interest.