Paradeep Phosphates Ltd. - IPO Note
Fertilizers
Paradeep Phosphates Ltd. - IPO Note
Fertilizers
Stock Info
Shareholding (Pre IPO)
Shareholding (Post IPO)
Strengths and Strategies
Second largest manufacturer of Phosphatic fertilizers in India:
Among private sector entities with a focus on the non-urea segment, PPL is the 2nd
largest in terms of phosphatic fertilizer (DAP and NPK complexes) capacity, as of
March 31, 2022. Also, they were the 2nd largest backward integrated manufacturer
in the private sector with Phosphoric acid capacity in India.
| Fiscal 2022 | Fiscal 2021 | Fiscal 2020 | |||||
|---|---|---|---|---|---|---|---|
| Production plant | Annual Granulation capacity (in million MT) | Actual capacity (in million MT) | Capacity utilization (%) | Actual capacity (in million MT) | Capacity utilization (%) | Actual capacity (in million MT) | Capacity utilization (%) |
| DAP and NPK | 1.50 | 1.4 | 87% | 1.2 | 85% | 1.20 | 88% |
| Sulphuric acid | 1.39 | 1.39 | 90% | 1.39 | 76% | 1.39 | 73% |
| Phosphoric acid | 0.30 | 0.30 | 100% | 0.30 | 97% | 0.30 | 88% |
In general, operations in the fertilizer industry are capital intensive due to high costs of land acquisition, construction of manufacturing facilities and high costs of equipment and machinery. Fertilizers manufacturing plants with proximity to transportation facilities typically have logistical benefits. In view of the above, the scale of their facility, their proximity to Paradeep port, access to a network of railways, waterways and highways provides them with a competitive advantage and an integrated business model.
Backward integration of facilities and effective sourcing:
Company’s primary raw materials includes Phosphate Rock, Phosphoric acid,
Ammonia, Sulphur and MOP. They source their raw materials from a number of suppliers
based locally and in countries such as Morocco, Jordan, Qatar and Saudi Arabia,
among others. The company procures raw material from 6 suppliers and all of them
have been supplying raw materials to PPL for more than 10 years. In order to ensure
a stable supply of their most important raw materials they have entered into a long
term supply agreement with various suppliers.
In addition, they have backward integrated their manufacturing process by producing the 2 most important & crucial key raw material by value, Phosphoric acid and Sulphuric acid.
Their integrated business model brings them significant advantages over their competitors, such as:
- reduction of raw material costs and logistics costs as they produce Phosphoric acid;
- ability to fully utilize the by-products and waste products generated from the manufacturing process;
- ability to sell excess Ammonia and Sulphuric acid to maximize efficiency of the production plants;
- reduction of reliance on external suppliers for Phosphoric acid, thereby helping to maintain a steady production of DAP and NPK, and limiting their exposure to price volatility;
- ability to manufacture more products, including different products with weak Phosphoric acid and strong Phosphoric acid across the production chain.
Secure and certified manufacturing facility and infrastructure and unutilised
land available for expansion
PPL has 5 atmospheric Ammonia storage tanks of 10,000 MT each (though limited to
8,000 MT each) that enables them to store Ammonia +in a safe manner. They also have
a dedicated team of employees who have the technical skill and expertise to handle
and store Ammonia.
In addition, their cross-country pipeline and civil infrastructure is made of reinforced cement concrete. PPL has high flexibility at their manufacturing facility as they have 4 trains of equal capacity capable of producing both DAP and NPK, enabling them to improve and maintain their manufacturing facility without halting their production.
Established brand name backed by an extensive sales and distribution network:
Company’s brands ‘Jai Kisaan – Navratna’
and ‘Navratna’ are well-known to the farmers in the Eastern
parts of India. They cater to nearly all types of crops. They are able to generate
demand for their brand through their marketing activities, which are directed towards
distributors and farmers. They consist of a broad range of advertising and promotional
tools. They have established an extensive sales and distribution network. They distribute
their products across 14 states in India through various private and institutional
channels. Further, they have a dedicated team of 70 marketing officers, 9 junior
agronomists and 71 field assistants.
Improve the leadership position by enhancing the production capabilities and having
a more diversified product portfolio
PPL has taken a number of measures to enhance their production capacities. They
had increased their annual production of Sulphuric acid by 529,470 MT through the
installation of a new acid plant, with commercial operations starting March 2016.
They also added a 23 MW power plant to increase capacity which started supplying
power in March, 2016, resulting in a total of 55MW of power capacity. They are currently
in the process of increasing the annual granulation capacity of their DAP and NPK
production plant to 1.8 Million MT from 1.2 Million MT which will be complete by
May 2022. They also intend to retrofit a new Phosphoric acid production plant to
increase their Phosphoric acid annual production by 120,000 MT and intend to install
a new evaporator to increase annual production of strong Phosphoric acid by 116,000
MT. In addition, they own large parcels of land aggregating to approximately 2,282.42
acres out of which almost 67% of the land parcel has no construction over it as
on date. They seek to utilize the additional available land for expansion of their
facilities on the remaining portion of the land parcel. Further, pursuant to the
completion of the Goa plant acquisition, they will gain access to additional product
mix, resulting in a more diversified product portfolio.
OVERVIEW OF GOA FACILITY
The acquisition of the Goa Facility provides them:
- increasing the size of the company, with a product portfolio comprising both Phosphatic and Nitrogenous fertilizers; and
- accessing the markets serviced by, and accessing the products and brand offered by Zuari Agro Chemicals Limited (ZACL), on March 1, 2021, PPL entered into a business transfer agreement (“BTA”) (amended by the Addendum to the Business Transfer Agreement dated July 30, 2021) with ZACL for the purchase of the Goa Facility (the “Goa Transaction”) as a going concern on a slump sale basis, for a total consideration equal to the Enterprise Value of Rs. equivalent of US$ 280.00 million, subject to necessary adjustments as specified in the BTA and further subject to customary conditions precedent.
PPL has already received an approval dated June 24, 2021 from the Competition Commission of India in relation to acquisition of the Goa Facility on a going concern basis from ZACL. They expect completion of the Goa Transaction to occur on or around the completion of the Offer, and upon such completion, PPL will acquire the business of manufacturing, distributing and/or trading of DAP, Urea, NPK and MOP products, each of which is currently being carried out at the Goa Facility.
Industry
Peer comparison
| Particulars (Rs. in Crores) FY21 | Revenue CAGR (FY19 - FY21) | EBITDA CAGR(FY19-21) | RoE (%) | RoCE (%) | EPS | PE (x) |
|---|---|---|---|---|---|---|
| Paradeep Phosphates Ltd | 9.00% | 10.80% | 10.40% | 13.00% | 3.88 | 10.82 |
| LISTED PEERS | ||||||
| Coromandel International Ltd | 4.00% | 18.20% | 25.80% | 28.00% | 45.22 | 18.72 |
| Chambal Fertilizers Chemicals Ltd | 12.00% | 67.40% | 31.50% | 13.00% | 39.76 | 11.57 |
| Deepak Fertilizers and Petrochemicals Ltd | -7.00% | 44.20% | 14.80% | 13.00% | 39.20 | 16.91 |
Risks
Business has high dependence on performance of agricultural sector:
The business is dependent on the performance of the agricultural sector in which
fertilisers are used. Any developments affecting the performance of the agricultural
sector are likely to affect its business.
Highly Regulated industry:
The fertiliser industry in India is regulated. Any change in government policies
towards the agriculture sector or a reduction in subsidies and incentives provided
to farmers could adversely affect business.
Dependence on a single manufacturing facility:
All the products are manufactured at facility in their Paradeep, Odisha (until the
completion of the Goa Transaction), and any shut down of the manufacturing facility,
will result in being unable to manufacture the products for the duration of such
shut down.
Company Description
Paradeep Phosphates Limited (“PPL”) was Incorporated in 1981, is a manufacturer of non-urea fertilizers in India. The company is part of the Zuari group and is engaged in manufacturing, trading, distribution, and sales of a variety of complex fertilizers such as DAP, three grades of Nitrogen-Phosphorus- Potassium (namely NPK-10, NPK-12, and NP-20), Zypmite, Phosphogypsum and Hydroflorosilicic Acid. Paradeep Phosphates Limited is the second largest private sector manufacturer of non-urea fertilizers and Di-Ammonium Phosphate (DAP) in terms of volume sales for the nine months ended December 31, 2021. The company's fertilizers are marketed under the brand names Jai Kisaan-Navratna and Navratna.
Company’s manufacturing facility is located in Paradeep, Odisha and includes a DAP and NPK production facility, a Sulphuric acid production plant and a Phosphoric acid production plant. They utilize Sulphuric and Phosphoric acids for manufacturing DAP and NPK. Their integrated business model has been critical to their success and a differentiating factor from their competitors. Company’s integrated business model provides them with the ability to drive profitability, optimize capital efficiency and maintain their competitive advantage.
As of March 31, 2021,
The total annual granulation capacity of DAP and NPK production plant was approximately 1.50 MMT;
The total annual installed capacity of Sulphuric acid production plant was approximately 1.30 MMT;
The total annual installed capacity of Phosphoric acid production plant was 0.30 MMT.
The volume of fertilizers manufactured and sold by the company:
(in MT)
| Financial Year 2022 | Financial Year 2021 | Financial Year 2020 | ||||
|---|---|---|---|---|---|---|
| Volumes | Volumes | Volumes | ||||
| Fertilizers | Manufactured | Sold | Manufactured | Sold | Manufactured | Sold |
| DAP | 721,565 | 724,109 | 638,737 | 658,097 | 564,132 | 646,484 |
| DAP (Tolling) | 19848, | 19,845 | - | - | - | - |
| NPK | ||||||
| - NPK-10 | 85,555 | 85,663 | 81,490 | 97,932 | 106,283 | 90,303 |
| - NPK-10 (Tolling) | 9,485 | 4,133 | - | - | - | - |
| - NPK-12 | 30,663 | 31,294 | 26,465 | 25,852 | 12,380 | 12,294 |
| - NP-20 | 380,062 | 375,953 | 275,200 | 338,207 | 378,625 | 377,289 |
| Zypmite | 40,540 | 39,260 | 16,574 | 19,685 | 23,036 | 22,975 |
| Phospho-gypsum | 1,583,132 | 1,583,132 | 1,205,347 | 1,205,347 | 914,422 | 914,422 |
| HFSA | 4,903 | 4,903 | 3,507 | 3,507 | 3,343 | 3,343 |
Valuation
Over FY19-21, PPL reported a decent growth in the business with almost stable profitability. Mainly on the back of higher trading business in FY21, PPL reported an 8.9% CAGR rise in the top-line to Rs.5,164.7cr in FY21. Total operating expenditure increased in-line to the top-line, thereby leading to a 10.8% CAGR rise in consolidated EBITDA to Rs. 542.2cr in FY21. EBITDA margin expanded by 37bps during the period to 10.5% in FY21. Lower finance cost and effective tax rate, led to a 18.5% CAGR rise in reported PAT to Rs. 223.3cr in FY21. PAT margin expanded by 68bps to 4.3% in FY21.
To further expand its product portfolio and to access the high fertilizer demand markets of Maharashtra and Karnataka, the company has entered into a business transfer agreement with one of the promoter group entities for the purchase of a fertilizer plant in Goa (Goa facility) for a consideration of Rs. 2,052.3cr. Subsequent to the acquisition, PPL’s fertilizer production capacity is likely to expand by 1.2mn tonnes. Post-acquisition of the Goa facility, PPL will become the 8th largest bulk fertilizers manufacturing company and 4th largest private bulk fertilizers manufacturer in India.
At the upper end of the IPO price band the stock is offered at 10.82x its FY21 earnings, which is at significant discount to the peers. Considering the above observations, we recommend “SUBSCRIBE” rating for the issue.
Key Information
Use of Proceeds:
PPL is coming up with an IPO with 35.756 - 37.594cr shares (fresh issue: 23.905
- 25.744cr shares; OFS shares: 11.851cr shares). This offer represents around 43.90%
of its post issue paid-up equity shares of the company. Total IPO size is Rs. 1,466.2
- 1,501.7cr.
The Government of India, as one of the promoter entities is fully offloading its stake (19.55%) in the company.
The IPO is a combination of fresh issue and OFS portion.
The company will not receive any proceeds from the OFS portion. Of the fresh issue net proceeds, Rs. 520cr will be used to partially fund the acquisition of Goa facility and another Rs. 300cr will be utilized for repayment/prepayment of the borrowings.
Book running lead managers:
Axis Capital, ICICI Securities Ltd, JM Financial, SBI Capital Markets ltd
Management:
Sabaleel Nandy is President and Chief Operating Office, Pranab Kumar Bhattacharyya
is Chief Manufacturing Officer, Alok Saxena is General Manager and Head of Corporate
Finance
Financial Statement
Profit & Loss Statement:- (Consolidated)
| Particulars | FY19 | FY20 | FY21 | 9M FY22 |
|---|---|---|---|---|
| Revenue from operations | 4357.90 | 4192.90 | 5164.70 | 5960.00 |
| Cost of raw materials consumed | -2847.60 | -2210.10 | -2265.10 | -3795.10 |
| Purchase of traded goods | -839.10 | -475.40 | -1380.20 | -1042.40 |
| Changes in inventories of finished goods, stock-in-trade and work in progress | 562.40 | -258.60 | -225.80 | 134.20 |
| Gross profit | 1233.60 | 1248.70 | 1293.60 | 1256.60 |
| Employee benefits expense | -130.60 | -131.90 | -139.20 | -100.40 |
| Other expenses | -661.50 | -657.10 | -612.10 | -577.50 |
| EBITDA | 441.50 | 459.70 | 542.20 | 578.70 |
| Depreciation and amortization expense | -70.10 | -72.50 | -83.30 | -67.10 |
| EBIT | 371.40 | 387.30 | 458.90 | 511.60 |
| Finance costs | -159.30 | -191.80 | -111.40 | -43.10 |
| Other income | 39.30 | 34.90 | 19.20 | 13.70 |
| Share of profit/ (loss) from associates | -0.10 | -0.80 | -0.20 | 0.60 |
| PBT | 251.40 | 229.60 | 366.50 | 482.90 |
| Tax expenses | -92.40 | -36.30 | -143.20 | -120.10 |
| Reported PAT | 159.00 | 193.20 | 223.30 | 362.80 |