IPO Size: Rs. 1,502 cr

• 2/3^rd is fresh issue, comprising Rs. 520 cr for part-financing 1.2 MTPA Goa plant purchase and Rs. 300 cr debt repayment
• 1/3^rd is OFS, 95% of which is exit of entire 19.5% by Govt of India. Balance 5% is OFS by promoter (joint venture between Zuari Agro and OCP, Morocco).

Price band: Rs. 39-42 per share

M cap: Rs. 3,420 cr, implying 44% dilution

IPO Date: Tue 17^th May to Thu 19^th May 2022, Listing: 27^th May 2022

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

India’s 2^nd Largest DAP Fertilizer Seller

Company manufactures diammonium phosphate (DAP) and NPK fertilizers at Paradeep, Odisha, wherein installed capacity 1.2 MTPA is being augmented to 1.8 MTPA by month-end i.e. May 2022. Commanding 9.2% market share in DAP sales in India in FY22, company has a distribution network of 4,761 dealers and 67,000 retailers catering to over 50 lakh farmers.

Goa Acquisition to Nearly Double Capacity

Company is acquiring Zuari Agro’s 1.2 MTPA capacity plant in Goa (0.8 MTPA phosphates, 0.4 MTPA urea) at an enterprise value of Rs. 2,050 cr or equity value of about Rs. 579 cr, augmenting its fertilizer manufacturing capacity to 3 MTPA by Sep 2022. This purchase adds higher-margin ‘Jai Kisan’ brand to its own Navratna brand, besides spreading market presence from East, to additional 2,900 dealers, 17,800 retailers and 27 lakh farmers in South, Central and West India, accounting for 44% of the consumption market.

Competitive Advantage

• Increasing capacity of key input, phos acid, from 3 lakh to 5 lakh MTPA at Paradeep will meet 90% requirement captively, from 75% currently.
• Exclusive sourcing from Moroccan JV partner provides cost advantage in an inflationary environment, as well as immunity from lower availability as Russia-Ukraine account for 14% urea and 11% phosphates exports.
• Company owns 2,282 acres of land in Paradeep, of which, only 1/3rd is occupied by existing plant, with balance 2/3rd available for future expansion.

Strengthening Financials

During FY19-21, revenue grew at 9% CAGR to Rs. 5,165 cr, while PAT rose to Rs. 223 cr, clocking 18% CAGR. 9MFY22 financials surpassed FY21 performance, with revenue growing to Rs. 5,960 cr and PAT at Rs. 363 cr, expanding net margin to 6%, from 4% earlier. Supported by backward integration, company’s 9MFY22 EBITDA/ton of Rs. 5,400 is similar to Chambal and higher than leader Coromandel’s Rs.4,900.

Interest cost reduced from Rs. 111 cr in FY21 to Rs. 43 cr in 9MFY22 on timely receipt of Govt. subsidy (uplifting the entire industry), although of the Rs. 1,851 cr debtors (as of 31.12.21), 21% or Rs. 405 cr are outstanding for over 3 years, but mostly considered good.

Present equity stands at Rs. 575 cr (FV Rs. 10 each) with net worth of Rs. 2,188 cr. Post IPO, present net debt to equity ratio of 0.7x will contract to 0.4x.

Attractive Valuation

Based on 9MFY22 EPS of Rs. 6.3, FY22E EPS is about Rs. 7.25 (as Q2 and Q3 are peak season quarters), translating into a PE multiple of 5.8x on FY22 basis, which is undemanding vis-à-vis peers Coromandel, Chambal, Mangalore Chemicals ruling between 9-14x. Backward integration, brownfield expansion and Goa plant acquisition provides healthy growth visibility, supported by a high-quality management, which will be tasked to improve Goa operations’ Rs. 1,500/MT EBITDA.