Update (27-6-19, 6 pm): Issue withdrawn one day prior to opening date. 

Verdict: Knocking at Poor Returns

IPO Snapshot:

KPR Agrochem is entering the primary market on Friday 28^th June 2019, to raise Rs. 278 crore via an IPO, comprising fresh issue worth Rs. 210 crore and an offer for sale (OFS) of up to 1.2 crore equity shares of Rs. 10 each, both in the price band of Rs. 59 to Rs. 61 per share, with retail discount of Rs. 3 per share. Issue, representing 38.7% of the post issue paid-up share capital (at upper end), closes on Tuesday 2^nd July with listing likely on 10^th July.

Allocation among different category of investors is a little different for this issue, with only 25% of the offer reserved for QIB (against usual 50%). Retail has 40% reservation (higher than 35%) while HNIs get 35% (much high than usual 15%).

Objects of Issue and Shareholding:

Fresh issue proceeds of Rs. 210 crore will be used to

(i) Retire debt worth Rs.30 crore

(ii) Fund working capital needs to the tune of Rs. 120 crore

(iii) Balance for general corporate purposes and issue expenses

Presently, promoters hold 72.02% stake, with 15 individuals holding balance 27.98%. 1/3^rd of the OFS portion of Rs. 73 crore or 1.2 crore shares are being offered by promoters and balance by individual non-promoter shareholders. Post IPO, their shareholding will contract to 48.04% and 13.23% respectively. 

Company Background:

KPR is an agro chemicals maker, having 4 manufacturing facilities in Andhra Pradesh, Telangana and Karnataka, with an installed capacity of 555,000 MTPA of crop nutrients, 21,560 MTPA of crop protection products, 34,560 MTPA for veterinary feed supplements, 175,800 MTPA for chemicals and 15,000 MTPA for seed processing. Except for veterinary feed supplements operating at 98%, capacity utilization at all others were less than 55% for FY18. Company markets its products under various brands such as Fast, Motox-10G, Samrat Atrazine50% WP, Mega Imida, Ajay, Annadata SSP, Abhaya Cal Mix, Apurva Seeds etc. It has established a distribution network comprising 8,000 dealers and 126 company operated retail outlets called Kisan Seva Kendras.

Financials: lacks growth 

Since past 5 years, company’s revenue and profits have remained flat, with FY14 revenue of Rs. 613 crore dropping to Rs. 600 crore in FY18 – and this has been the case for all the years in between as well. FY18 net profit stagnated at Rs. 29.7 crore, resulting in 4.9% net margin. Consolidated 9MFY19 revenue stood at Rs. 483 crore, up 8% YoY, comprising of fertilizers (59% of revenue), pesticides (22%), chemicals (15%) and seeds (5%). Before the IPO, 9MFY19 net profit of Rs. 27.6 crore strengthened net margin to 5.7%. On an equity of Rs. 85.46 crore, 9MFY19 EPS stood at Rs. 3.23 vis-à-vis FY18 EPS of Rs.3.47.

On net worth of Rs. 252 crore, BVPS is Rs. 30. Company’s balance sheet is highly leveraged, with total debt on books of Rs. 323 crore. Current debt equity ratio of 1.23:1 is quite steep, However, it will drop to 0.60:1 post IPO, as equity expands and Rs. 30 crore is repaid.  

Red Flags:

• High working capital nature of business – low debtor realization (outstanding for over 4 months) and slow moving inventory (carrying over 5 months of inventory) block substantial amount of money in current assets. This is the primary reason why company is undertaking such large equity dilution of almost 30% via the fresh issue. 
• As many as 15 criminal proceedings pending in courts against the company for manufacturing and distributing non-standard fertilisers, products, not being in line with the regulations, bounced cheque etc. Civil cases pertaining to patent infringement is also pending under litigation. These are serious risks facing the business.
• In the past, group company defaulted on loans to banks classifying them as NPAs and invoking promoter guarantee. Thankfully, sale of business helped cleared the bank debt and KPR Agrochem did not have any monetary impact. However, it does highlight the weak financial position of the promoter group. 

Valuation:

Given weak fundamentals, no point taking a valuation call and pondering over retail discount of 5%. Nevertheless, at Rs. 61 per share, company’s market cap will be Rs. 731 crore with EV of Rs. 1,011 crore. On FY19E basis, PE and EV/EBITDA multiples work out to 18x and 10x respectively, while on FY20E, on expanded equity, these are 15x and 9x respectively, which is quite a stretch and steep, given small scale of operations, flat growth and 9MFY19 annualised RoE of 14.7%. Moreover, peers such as Dhanuka Agritech and Insecticides India are ruling at much lower PE multiples (10-16x historic), despite higher topline of Rs.1,050 crore, 8-11% net margin and 20% RoE for Dhanuka. Thus, IPO valuations of KPR are not attractive either.  

Conclusion:

Absence of financial growth, weak working capital position, multiple pending litigations make this issue absolutely unattractive. Hence, we subscribe an ‘avoid’ to the IPO.

Grey Market Premium (GMP) of KPR Agrochem: Grey Market Premium of KPR Agrochem is an unofficial figure, against guidelines of SEBI. We strongly recommend investors against following the grey market premium. To know more about grey market premium and how it operates, read our article on ‘grey market premium’ in Pathshala column.

Disclosure: No Interest.