Verdict: High margin business in a ‘hot’ sector

Rs. 800 cr IPO: 88% is OFS by promoters (2/3^rd OFS) and some individual shareholders (1/3^rd OFS) and 12% is fresh issue for meeting working capital needs of Rs. 80 cr.

IPO Date: Wed 23^rd Jun to Fri 25^th Jun 2021

Price band: Rs. 290-296 per share

Post Issue M cap: Rs. 3,409 cr ,implying 23.5% dilution

Listing: 5^th Jul 2021

Lucknow based B2B supplier to Agro Chemical sector

Company derives 78% of its Rs. 650 cr revenue from agro chemical technicals and 22% from formulations, exporting 60% products to crop protection firms like Sygenta, UPL, BASF in Australia, Europe and Asia. Commercialisation of 3 technicals accounted for 40% of FY21 revenue and going forward, company plans to focus on technicals going off-patent.

High Growth Visibility

Company is the only Indian manufacturer for 5 technicals, and is developing 8 new technicals (2 fungicides, herbicides, insecticides and intermediates each), of which, 2 are likely to start contributing to revenue from Q2FY22E.

With agro chemical technicals’ utilization reaching 77% of 19,500 MTPA capacity, it is expanding capacity by 50% over the next 12 months, to 30,000 MTPA, to be funded via internal accruals. Formulation capacity stands at 6,500 MTPA, taking total manufacturing capacity to 26,000 MTPA.

High Margin and High RoE Business

Between FY19-21, company’s revenue grew at 38% CAGR on back of capacity expansion from 16,000 MTPA in FY19 to 26,000 MTPA in FY21, with 2 year PAT CAGR of 75%. Average net margin between FY18-20 was healthy at 13.5%.

In FY21, 33% volume growth led to 35% YoY growth in revenue to Rs. 640 cr, with EBITDA rising 83% YoY to Rs. 190 cr, and EBITDA margin strengthening to 29% from 22% in FY20, on better product mix and operating leverage kicking in. PAT rose 90% YoY to Rs. 135 cr in FY21, leading to very strong 21% net margin and EPS of Rs. 12, on a small equity base of Rs. 11.2 cr (FV Re.1). It is debt free, clocking RoE of 35% in FY21, up from 28% YoY.

While margins and return ratios are healthy, debtors outstanding are as high as 4 months, even when there are no government subsidies.

2 Red Flags

• Two products Captan and Ziram, accounting for 18% revenue, may be banned for sale in India. However, company believes it is unaffected by the same, as exports are permitted.
• In Jan 2021, 3.7 lakh shares (0.3% equity) allotted to the family of a non-executive director at Rs. 33.70 per share. This is a related party transaction, considering quantum of shares and huge discount to IPO price. 

Valuation At Lower End

At Rs. 296, company’s m cap will be Rs. 3,409 cr, implying FY21 and FY22E PE multiples of 24x and 19x respectively, while peers are ruling at one year forward PE of 19-34x, making India Pesticides’ valuation at the lower end.

The sector is growing well due to high need for improved agri productivity and ‘China + one’ policy of user industry. Company is well placed due to its capacity expansion, high margin (both historically and in FY21), debt free balance sheet and reasonable valuation.

Conclusion

Strong margins, low equity coupled with healthy growth visibility due to expansion make the IPO attractive. We recommend ‘subscribe’. 

Grey Market Premium (GMP) of India Pesticides: Grey Market Premium of India Pesticides 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.