India Pesticides Ltd - IPO Note
Pesticides & Agrochemicals
India Pesticides Ltd - IPO Note
Pesticides & Agrochemicals
Stock Info
Shareholding (Pre IPO)
Shareholding (Post IPO)
Strengths
Wide variety of products with focus on export market
Over the years, the company has diversified their product portfolio and has developed
a niche portfolio of agro-chemical products. The company has grown into a multi-product
manufacturer of formulations, herbicide and fungicide technicals as well as APIs.
This diversification across products and sectors has allowed them to de-risk their
business operations. As of the date, the company has a license to manufacture for
49 agro-chemical technicals and 158 formulations and for APIs, they have obtained
a license for manufacturing 2 drugs for sale. The company’s products are exported
to regulated markets including Australia and other countries located in Europe,
Africa and Asia and have received product registrations either through their customers
or by the company. The company commenced manufacturing of technicals for herbicides
in 2018 that are exported which has led to an increase in their EBITDA margins from
21.6% in FY18 to 29.2% in FY20. The company’s diversified product portfolio
allows for limited dependence on individual products and helps counter seasonal
trends that are, in particular, a challenge for the agriculture industry in India.
Their major customers include multinational corporations, and hence, 56.7% of their
FY21 revenue was generated from exports.
Long-term relationship with key customers
The company has developed strong and long-term relationships with various multinational
corporations that has aided in expanding their product offerings and geographic
reach for their technicals business. These multinational corporations look to collaborate
with active ingredient manufacturers in India, leveraging their cost effective manufacturing
coupled with cheaper labour force and stronger R&D capabilities. The company’s
customer relationships are led primarily by their ability to manufacture complex
Technicals that go off-patent in a cost effective, safe and environmentally conscious
manner as well as their ability to meet stringent quality specifications. They undertake
exports of their products, and either their customers get their products registered
with the relevant regulatory authority or IPL register their products with the respective
regulatory authority directly. Several of their customers have been associated with
the company for over 10 years and certain of their key customers include crop protection
majors, such as, Syngenta Asia Pacific Pte. Ltd. and UPL Ltd.
Extensive distribution network along with strong sourcing capabilities
The company source their primary raw materials from sources within and outside India
and have developed relationships with multiple vendors for their major raw materials
to ensure timely delivery and adequate supply. In FY21, 62% of their raw materials
were sourced locally and this ability to procure raw material domestically enables
them to withstand volatility in raw material prices and ensures continuous supply
for their operations. The company’s vendor selection is based on pre-determined
criteria ensuring all raw materials procured meet stringent regulatory and quality
checks. The company has a dedicated sales team which is focused on direct selling
to customers and leveraging the relationship with them to increase sales of technicals.
For their technicals and formulations segment, they have a Pan-India sales and distribution
presence with a dedicated sales force. As of March 31, 2021, they have a network
of over 20 sales depots consisting of branches, carrying and forwarding agents,
and warehouses spread across 15 states in India and their distribution network comprised
a number of dealers and distribution partners across India.
Strong R&D and product development capabilities
The company has substantial experience in undertaking R&D activities as part
of their manufacturing operations. Their R&D places significant emphasis on
identification of appropriate complex technicals that are suitable for commercialization,
improving their production processes and the quality and purity of their present
products and manufacturing new off-patent products. The company has two well-equipped
R&D laboratories, each of which is registered with the DSIR and their laboratories
are equipped with sophisticated equipment that include gas chromatography, mass
spectrometry and Karl Fischer titrators etc. The company’s R&D efforts
also focus on determining the optimal production process for the technicals and
reduce energy consumption. The company continuously seek to innovate to develop
alternate production processes for their existing technicals and for technicals
that are expected to go off-patent in the near future. As part of these measures,
they undertake pilot studies of new technologies.
Capacity expansion of business and geographies shall boost growth
The company aims to scale up the manufacturing capacities for their existing products
to cater to the growth in demand for the products. They have obtained approval from
the Ministry of Environment, Forest and Climate Change (“MoEF”) to expand
their manufacturing capacity at Sandila to 30,000 MT. In addition, they continually
explore new markets for their existing products. Their expansion and diversification
of their product portfolio would allow them to service new clients, meet existing
demand and consequently, enhance their business prospects. The company intends to
augment their organic growth by pursuing selective acquisitions and strategic alliances
and may consider other acquisition opportunities to selectively expand in their
verticals, provided such opportunities offer the synergies.
Risks
- Business is working capital intensive: If they experience insufficient cash flows from operations or are unable to borrow to meet working capital requirements, it may materially and adversely affect business and results of operations.
- Agro-chemicals business is subject to climatic conditions, the overall area under cultivation and the cropping pattern adopted by the farming community. Seasonal variations and unfavorable local and global weather patterns may have an adverse effect on business, results of operations and financial condition.
- There is a growing consumption of bio-pesticides globally and in India. The use and adoption of bio pesticides by customers may affect competitive position and thereby have an adverse effect on business, results of operations, and financial condition.
Company Description
Incorporated in 1984, India Pesticides Ltd. (IPL) is fastest growing agro-chemical companies in India in terms of volume of technicals manufactured. They are the sole Indian manufacturer of five technicals and among the leading manufacturers globally for Captan, Folpet and Thiocarbamate herbicide in terms of production capacity. The company operates in two business verticals: (1) technicals and (2) formulations. In the first vertical, it manufactures generic products, which are used to manufacture fungicides and herbicides as well as Active Pharmaceuticals Ingredients (APIs) with applications in dermatological products. In the second vertical, the company manufactures and sells various formulations i.e. insecticides, fungicide and herbicides and growth regulators which are ready-to-use products. The company currently has 2 manufacturing facilities in Uttar Pradesh, which are spread across over 25 acres. As on FY21, their aggregate installed capacity of their manufacturing facilities for agro-chemical technicals and formulations stood at 19,500 MT and 6,500 MT. While the technicals are majorly exported to more than 25 countries including Australia, Asia, Africa, and European countries, agrochemical formulations are primarily sold to domestic crop protection manufacturers i.e. Sharda cropchem, UPL and Syngentia Asia etc.
Valuation
The company’s growth prospects look promising, considering the i) big opportunities in technicals going off patent ii) capacity expansion iii) strong demand for domestic agrochemical companies in global markets and iv) its established presence in export markets. At the upper price band of Rs 296, the IPO is valued at 24.5x of FY21 earnings, which looks reasonable given the complex chemistries (chlorination, etc.) that the company deals with. Further the company has better return ratios (RoE at ~35% in FY21) compared to peers like PI Industries and Rallis India and has strong relationship with multinational companies which augurs well. Hence, we recommend SUBSCRIBE to the IPO for long term perspective.
Key Information
Use of Proceeds:
The offer comprises of a fresh issue and an offer for sale. Out of the fresh Issue
of Rs 100 crores, Rs 80 crores is proposed to be utilized for working capital requirement
of the company and the balance Rs 20 crores is to be used for general corporate
purposes. The balance Rs 700 crores of the issue would be through offer for sale
by the shareholders and proceeds would go to such selling shareholders.
Book running lead managers:
Axis Capital, JM Financial
Management:
Anand Swarup Agarwal (Chairman and non-executive director): He holds a bachelor’s
degree in law from the University of Lucknow and has over 35 years of experience
in the manufacturing sector. He provides strategic guidance to the company’s business
activities Dheeraj Kumar Jain (Managing Director and Chief Executive Officer): He
holds a bachelor’s degree and a master’s degree in chemical engineering from Osmania
University, Hyderabad India. He joined India Pesticides Limited on December 1, 1995.
He has more than 25 years of experience with the Company and has been responsible
for product development, international business development and project engineering.
Satya Prakash Gupta (Chief Financial Officer): He holds a bachelor’s degree in commerce
from the University of Allahabad. He is an associate member of the Institute of
Cost Accountants of India and an associate of the Institute of Chartered Accountants
of India. He has over 27 years of experience in the field of finance.
Financial Statement
Profit & Loss Statement:- (Consolidated)
| Yr End March (Rs Cr) | FY19 | FY20 | FY21 |
|---|---|---|---|
| Net Sales | 341.00 | 480.00 | 649.00 |
| Material Cost | 187.00 | 253.00 | 310.00 |
| Employee Cost | 13.00 | 16.00 | 23.00 |
| Other Expenses | 75.00 | 117.00 | 133.00 |
| EBITDA | 65.00 | 94.00 | 183.00 |
| EBITDA Margin | 19.00% | 20.00% | 28.00% |
| Depreciation & Amortization | 4.00 | 5.00 | 6.00 |
| EBIT | 61.00 | 89.00 | 177.00 |
| Other Income | 5.00 | 10.00 | 6.00 |
| Interest & Finance Charges | 6.00 | 5.00 | 3.00 |
| Profit Before Tax - Before Exceptional | 61.00 | 94.00 | 180.00 |
| Tax Expense | 17.00 | 23.00 | 46.00 |
| Effective Tax rate | 28.00% | 24.00% | 25.00% |
| Net Profit | 44.00 | 71.00 | 135.00 |
| Net Profit Margin | 13.00% | 15.00% | 21.00% |