About the company:
Indian Pesticides Ltd (IPL) is coming out with its IPO wherein the company is aiming to raise Rs. 800 crores with a fresh issue of Rs. 100 crores and an offer for sale of Rs. 700 crores. The price band has been set at Rs. 290 – Rs. 296 per share for a lot of 50 shares. Post the issue, the implied market capitalization of the company is expected to stand between Rs. 3,342 crores and Rs. 3,409 crores based on the lower and upper price bands, respectively. Out of fresh issue of Rs. 100 crores, the company intends to use Rs. 80 crores towards working capital requirements. The IPO will be open for subscription on June 23, 2021 and will close on June 25, 2021.
Company Overview:
IPL, incorporated in 1984, is one of the leading agrochemical manufacturers in India in terms of volume of Technicals manufactured. The company has two business verticals namely, Technicals and Formulations. IPL recorded a 37.2 percent YoY growth in Technicals manufacturing (by volume) between FY2020-21. The company is the sole Indian manufacture of 5 Technicals and among the leading manufacturers globally for Captan, Folpet and Thiocarbamate Herbicide in terms of production capacity. The Technicals are exported to 25 countries while Formulations are primarily sold domestically through an extensive network of dealers and distributors. The company has a strategic focus on R&D and is equipped with 2 in-house laboratories. Additionally, IPL has 2 manufacturing plants at Lucknow and Hardoi in Uttar Pradesh with an installed capacity of 19,500 MT for agrochemicals and 6,500 MT for Formulations.
It derives most of its revenue from Technicals and its contribution increased by 5 percent in FY20 but marginally declined in FY21. Revenue from Technicals reported a growth of 41 percent CAGR over the last 3 years. The Formulations business comparatively grew at a lower rate of 27 percent CAGR.
Robust Financial Performance:
The company has been growing strength by strength and reported a revenue growth of 38 percent CAGR in the last 3 years. During the same period EBITDA and PAT jumped by 67 percent CAGR and 75 percent CAGR, respectively. IPL managed to demonstrate improvement in its margins on the back of reduced raw materials cost. The margins witnessed a jump due to the cost cutting measures taken by the Company.
IPL has managed to post robust return ratios with ROE at 34.4 percent and ROCE at 43.6 percent which is one of the highest in the industry. The company has a strong balance sheet with negligible debt and has reduced the Debt-Equity ratio to 0.08x from 0.29x reported earlier.
EPS has almost tripled with the company reporting EPS of Rs. 3.94, Rs. 6.35 and Rs. 12.07 in FY19, FY20 and FY21, respectively.
Competitive Strengths:
• Strong R&D and product development capabilities - IPL’s R&D expense forms a mere 0.31 percent of FY21 revenue but these R&D efforts have resulted in development of processes for products that are not highly toxic and commercialization of 3 Technicals which contributed 42.1 percent to the revenue in FY21.
• Diversified portfolio of niche and quality specialized products - The company has diversified their product portfolio over the years and have grown into a multi-product manufacturer of Formulations, herbicide and fungicide Technicals and APIs. This has allowed the company to de-risk its business operations as its core strength is its products which are characterized by good quality and low toxicity.
• Strong Long-term relationship with key customers - Even though the company does not enter into long-term contracts with its customers, it has established strong relationships with a few agro-chemical majors like UPL Ltd, and Syngenta Asia Pacific Pvt Ltd. Some of the company’s customers have been associated with them for over a period of 10 years which enable them to have a constant stream of orders & stable revenue.
• Strong sourcing capabilities and extensive distribution network - IPL has built long-term relationships with multiple vendors and has reduced dependence on a single and limited number of suppliers. In FY19, FY20 and FY21, 64.9 percent, 65.4 percent and 61.9 percent of raw materials were sourced locally while 30.3 percent of total raw material were sourced from China in FY21. Sourcing of raw materials locally ensures continuous supply and low volatility in raw material prices. Additionally, a minimum inventory of 20 days’ supply of raw materials helps improve their cash conversion cycle.
Strategies going forward:
• Continue to focus on R&D and process innovation to expand their product portfolio, grow customer base and revenue share with existing customers - Between 2019 and 2026, 19 Technicals are expected to go off-patents thus opening up an opportunity for the company to expand its product portfolio. IPL aims to increase its market share in the Technicals and Formulations segments and is expected to launch new products in the near future.
• Focus on cost optimization - The company intends to undertake strategic initiatives including expansion of existing manufacturing capacity that will benefit from economies of scale and improved process efficiency in manufacturing processes.
• Capitalize on industry opportunities - The agro-chemical industry is slated to benefit due to the increased need for productivity and crop protection. The ‘China plus one’ strategy is going to benefit India as multinationals are looking at alternatives to reduce dependance on China. Given the extensive R&D facilities, improving manufacturing capabilities and experience in manufacturing, IPL is well-positioned to capitalize on these opportunities.
• Expand business and geographical footprint through inorganic growth - The company has followed an organic growth strategy until now. However, it plans to pursue selective acquisitions and strategic alliances that will provide access to better infrastructure, industry knowledge, technological expertise and geographical reach.
• Diversification into specialty chemicals - IPL recently incorporated a Subsidiary, Shalvis Specialities Limited, on January 18, 2021, that intends to manufacture specialty chemicals.
Risks:
• Increasing use of bio-pesticides globally has the potential to harm the competitive position of IPL given that the Company hasn’t ventured into that segment. The bio-pesticide market is expected to experience a double-digit growth in India in the next five years (2019 to 2024) which could prove to be a source of competition to IPL.
• In May 2020, government proposed to ban 27 insecticides in India. This list includes the company’s products like Captan and Ziram. Captan contributed ~18 percent of the company’s revenue. The proposed ban is not in effect yet. However, the government clarified that this ban would spare insecticides manufactured for the purpose of exports only.
• Top 10 customers account for 56.8 percent of the revenue. The largest customer accounts for 19.23 percent of the business. Loss of one customer could significantly impact the business. Due to this concentration, customers have better bargaining power and margins could be negatively impacted.
Recommendation:
At an upper price band of Rs. 296/share, the company is demanding a P/E multiple of 24.52x on FY21 earnings, which in comparison is lower than most peers. However, Dhanuka Agritech Ltd, which is the company’s direct competitor commands a P/E multiple of 21.7x thus making the current valuation more or less at par. Given the slew of recent IPOs, and potential subdued investor sentiment, IPL may not post significant listing gains.
Hence, only if the sentiment improves by the last day of issue period, investors can take a risk. Nevertheless, the company can be kept on radar for a few quarters till further clarity on the risks for long term investment.
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