IPO Size: Rs. 144 cr IPO

• Rs. 112 cr is fresh issue for (i) Rs. 25 cr capex (ii) Rs. 70 cr working capital
• Rs. 32 cr is offer for sale (OFS) by individual investor, completely exiting 12% holding

Price band: Rs. 39-41 per share

M cap: Rs. 379 cr, implying 38% dilution

IPO Date: Mon 22^nd Jan (now 23^rd Jan) to Wed 24^th Jan 2024 (now 25^th Jan), Listing Tue 30^th Jan 2024 (now 31^st Jan)

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Regional Crop Solutions Company

Nova Agri Tech manufactures crop nutrition (fertilizer) and crop protection (insecticides, fungicides, herbicides) products, with ~70% of its Rs. 211 cr revenue generated from home state Telangana and Andhra Pradesh. Operating at about 50% manufacturing capacity utilisation, it has a network of 6,762 active dealers across 16 Indian states, as also, undertakes farmer outreach through 250 individuals for farmer education, technology-enabled soil health analysis and providing ‘Nova Agribot’ drones.

Growth Area

Company is undertaking Rs. 25 cr greenfield expansion, to be funded from fresh issue proceeds, untill FY25, which will increase product categories and capacities.

Secondly, it will import and locally distribute technicals from Taiwan and China, which has good demand in domestic market.

Working Capital Intensive

Key challenge of the business is demand for heavy working capital, as debtors are outstanding for over 6 months, in all of the past 3 fiscals – FY21, FY22 as well as FY23. Even inventory levels of over 2.5 months is on the higher side. No wonder that majority of fresh issue will fund working capital needs.

Rising Margins

Between FY21-23, Nova’s revenue has grown at 19% CAGR to Rs. 211 cr, and cost reduction efforts expanded EBITDA margin from 11% in FY21 to 19% in FY23. FY23 PAT stood at Rs. 20 cr, which rose 51% YoY to Rs. 10 cr in H1FY24, leading to a healthy 10% net margin. EPS stood at Rs. 1.7 and Rs. 3.3 for H1FY24 and FY23 respectively.

High Double Digit RoE going forward

On gross debt of Rs. 69 cr and net worth of Rs. 74 cr (as of 30.9.23), debt-to-equity ratio is high at 0.9:1. However, equity expansion post IPO will moderate debt-to-equity ratio to 0.4:1, even though no debt is being repaid from IPO proceeds. As the denominator rises, RoE of 32%, reported for FY23, will also drop to nearly half, with equity expansion, which is nevertheless healthy.

Priced at Discount to Peers

On FY24E EPS of Rs. 3.8, share is offered at a PE multiple of 11x, on current year basis. Given the heavy dilution of 30% for fresh issue, FY25E EPS is also estimated close to 3.8x, leading to a PE multiple of 11x a one year forward basis, lower than peer range of 14-25x.

• Dharmaj Crop, with Rs. 500 cr topline, 6% net margin and 9% RoE is ruling at a PE multiple of 18x
• Bhagiradha Chemicals has 500 cr topline, 9% net margin and 14% RoE is trading at a 25x PE
• Heranba, on the other hand, with higher topline of Rs. 1,300 cr topline, 8% net margin and 13% RoE, but flat growth, is also ruling at a PE multiple of 14x.

While Nova’s working capital management is weaker than peers, its net margin and return ratio are attractive, leaving some scope for PE expansion.

Nano Cap Stock  

With post listing m cap, at less of than Rs. 400 cr at upper end of price band, stock may be subject to additional surveillance mechanism (ASM) on stock exchanges. Thus, high exposure to the stock is not advised, but just a small percentage of portfolio.