Indian Pesticides Rs 800-cr IPO opens today; brokerages weigh in on pros and cons

Agrochemical company Indian Pesticides' three-day initial public offer (IPO) Rs 800-crore IPO opens tomorrow (June 23) and concludes on June 25. The bidding for anchor investors will open on June 22, according to the company.

The Rs 800-crore IPO comprises fresh issuance of equity shares amounting to Rs 100 crore and an offer of sale for equity shares aggregating up to Rs 281.4 crore by promoter Anand Swarup Agarwal and up to Rs 418.6 crore by other selling shareholders.

The Uttar Pradesh-based company may decide to undertake a pre-IPO placement of Rs 75 crore subject to consultation of the merchant bankers.

Proceeds of the fresh issue would be used towards funding the working capital requirements and general corporate purposes.

Hem Securities has weighed in with comments on the IPO.

Indian Pesticides is an R&D driven agro-chemical manufacturer of technicals with a growing formulations business, and is one of the fastest growing agro-chemical companies in terms of volume of technicals manufactured.

Valuation

IPL is bringing the issue at price band of Rs 290-296 per share at p/e multiple 25 on post-issue FY22 eps basis. Choice Broking said it liked the financial performance posted by the company with a healthy sheet status. As 19 technicals are expected to go off-patent between 2019 and 2026, and an opportunity size of voer $4.2 billion is expected due to this by 2026 which company is well poised to cater.

As for its technical product, the company is globally cost competitive which helps it in posting superior margins. With the focus on increasing its product portfolio, expanding geographical presence, onboarding more customers for newer molecules apart from molecules which are under implementation and already lined up as some of them will be going on stream sometime in September/October, future prospects ofthe company looks strong. Hence, we recommend 'subscribe' on issue both for listing gain and long-term purpose.

Strong R&D and product-development capabilities

IPL has substantial experience in undertaking R&D activities as part of its manufacturing operations. The company's analytical capabilities include critical quality control measures, non GLP-5 batch analysis, stability studies, method validation and method development. With 19 Technicals are expected to go off patent protection, as a result, the demand for these Technicals globally is expected to increase, particularly in regulated markets. With a number of products coming off patent, there will be significant opportunities to develop a number of off-patent/generic active intermediates. The Company intends to continue to leverage its R&D capabilities and manufacturing expertise and focus its investment in process innovation.

Long-term relationship with customers

IPL's major customers include multinational collaborations that look to collaborate with active ingredient manufacturers in India, leveraging their cost-effective manufacturing supported by cheap labour force. Several of IPL's customers have been associated with the company for over 10 years and are certain of the company's key customers including crop protection majors such as Syngenta Asia Pacific Pte. Ltd and UPL Limited's R&D capabilities.

Consistent track record

IPL's total revenue from operations increased by 90.48 percent from Rs 3,406.88 million in fiscal 2019 to Rs 6,489.54 million in fiscal 2021. The company has been able to maintain its debt position and its long-term debt to equity ratio was 0.09,0.06 and 0.02 as of March 31, 2019, 2020, and 2021. During fiscals 2019, 2020 and 2021, the company's ROCE was 32.33 percent, 35.82 percent 45.18 percent, respectively while its ROE was 23.46 percent, 27.48 percent and 34.36 percent, respectively.

IPL's strong operating ratios and its healthy debt equity ratio have allowed the company to grow its operations and will allow it to pursue other growth opportunities and fund strategic initiatives. This indicates strength in financials of company.

Diverse product portfolio

IPL's product portfolio has been diversified over the years and has grown into a multi-product manufacturer of formulations, herbicides and fungicides Technicals as well as APIs. Diversification across products and sectors has allowed de-risking of business operations. The company’s products are exported to regulated markets such as Australia and countries in Europe, Africa and Asia. Diversified product portfolio allows for limited dependence on individual products and helps counter seasonal trends, that are a challenge for agriculture industry in India

Risks

IPL require certain approvals and licenses in the ordinary course of business, including certain registrations from the Central Insecticides Board and Registration Committee (“CIBRC”) for its products manufactured and sold in India as well as for exports to other jurisdictions. Any failure to successfully obtain such registrations or renew or maintain its statutory and regulatory permits and approvals required to operate its business and manufacturing facilities would adversely affect company’s operations, results of operations and financial condition.

Choice Broking said, during FY19-21, IPL’s top-10 customers (comprising of seven from international jurisdictions) represented around 57 percent of revenue. While, its largest customer represented around 22 percent of the revenue during the period. Since the company generated significant portion of the business from few customer, there is a risk from revenue concentration, it said.

IPL's business is working capital intensive with an average working capital cycle of 114 days over FY18-21. Trade receivables were over 40 percent of the top-line. Thus inability in collecting receivables would adversely affect the working capital cycle and business of the company.

The brokerage said, at a higher price band of Rs. 296, IPL is demanding a P/E multiple of 25.3x (to its FY21 earnings of Rs. 11.7 per share), which is at premium to the peer average (excluding bigger players). Thus the issue seems to be fully priced. The sector has witnessed various regulatory actions (like ban of specific set of pesticides and actions from the Pollution Control Board) in the recent years, which is a concern. Thus considering the above observations, we assign a “Subscribe with Caution” rating for the issue.

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