Agrochemical company Heranba Industries opens its Rs 625-crore initial public offering for subscription on February 23 with a price band of Rs 626-627 per share.
The IPO, which will close on February 25, consists of a fresh issue of Rs 60 crore, an offer for sale of 90,15,000 equity shares by promoters. The net fresh issue proceeds will be utilised for working capital requirements.
Given the dominant position in pyrethroids market, better return ratios than peers, reasonable valuations to peers, increasing export opportunity, strong balance sheet with low long term debt and strong financial position, brokerages assigned a subscribe rating to the issue for listing gains as well as long term.
"The company has a robust past track record of performance. In the future, we expect company to gain market share and improve margins. Company has priced its issue at 22.1x PE on a trailing basis, which is quite reasonable by looking at the future prospects of the Company. Its peers such as Rallis India, Sumitomo Chemicals and Bharat Rasayan are trading at 23.1x, 47.3x and 27.0x PE on a trailing basis respectively," Angel Broking said.
"Company return ratios are superior to peers (return on equity-ROE is above 30 percent). Company has a strong financial position and has been generating positive cash flow. We are positive on the long-term prospects of the company, we recommend subscribing Heranba Industries IPO for long term as well as for listing gains," the brokerage added.
ICICI Direct also has a subscribe recommendation on the IPO. "Benefiting from being an integrated pyrethroids manufacturer with a strong product pipeline, geographical expansion coupled with favourable macro factors are likely to drive growth. Apart from this, it has one of the strongest return ratios in industry and healthy balance sheet," the brokerage reasoned.
Heranba Industries IPO: 10 things to know before subscribing the issue
Heranba Industries is a crop protection, chemical manufacturer, exporter and marketing company. The company manufactures intermediates, technicals and formulations and is one of the leading domestic producers of synthetic pyrethroids like cypermethrin, alphacypermethrin, deltamethrin, permethrin, lambda cyhalothrin etc.
The company has dominated the pyrethroids market with share of 19.5 percent (2019) of the total market size. The consumption value of pyrethroids is expected to grow by around 20 percent CAGR between 2020 and 2025. It exports its product to over 60 countries. Indian agrochemical market is expected to report a 7.9 percent CAGR between 2020-25. While pesticide, herbicides and fungicides are expected to report 7.6 percent, 8.2 percent and 8.3 percent CAGR between 2020-2025 respectively, contributing 53.1, 23.7 percent and 19.2 percent of total agrochemical market, respectively.
"Given increasing Indian agrochemical market along with Heranba's expanding geographical footprint, further scope to expand its capacity on current available land, debottlenecking of current facility, new product pipeline and higher return ratios compared to its peers, we expect the IPO to be fairly priced at 25.7x FY20 EPS and hence provide a subscribe rating on the stock," KR Choksey said.
Leveraging its cost leadership status, Heranba Industries, promoted by Sadashiv K Shetty and Raghuram K Shetty, plans to commercialise few molecules (2 fungicides, 2 herbicides and an insecticide) which are going off-patent. "Garnering own registrations & for distribution partners in overseas markets of Europe & NAFTA (2 received, 3 pending), ramping up formulation business (59 percent utilisation in FY20) and making capacity enhancement (vacant land of around 33,000 square meters in Sarigam and 34,600 square meters in Saykha) would be the growth mantra for Heranba going forward," said Prabhudas Lilladher recommended long term investors to subscribe to the issue.
The company has reported strong 13.3 percent and 44.4 percent revenue and PAT CAGR respectively from FY18 to FY20 and has achieved around 65 percent FY20 revenue in first half of FY21 itself. EBITDA margin has improved significantly from 11.8 percent in FY18 to 13.6 percent in FY20 and 16.1 percent in H1FY21.
The management expects FY21 revenues to be around Rs 1,150 to 1,200 crore, which would be about 20 percent YoY growth over FY20 and maintaining PAT margin of 10.5 percent in FY21, the net profit would be about Rs 125 crore, thus increasing at a CAGR of 38 percent between FY18 to FY21, said KR Choksey.
But while its growth has been rapid between FY17-20 (EBITDA and APAT CAGR at 39 and 70 percent), Prabhudas Lilladher expects growth rates to moderate between around 15-17 percent CAGR over the next few years.
As of FY20, 49 percent of its revenues came from the overseas markets which enabled Heranba to sail through the ups and downs locally. COVID-19 also had minimal impact on the company’s operations since all agrochemical companies were allowed to run at full capacities. On top of that it has recorded robust average ROE and ROCE of 31.3 percent and 56 percent respectively for the last three years.
"The company faces high risk due to shoot up in raw material prices which forms a whopping 70 percent of its expenses. Moreover, it faces high competition risk from peers such as Rallis India, Bharat Rasayan and Sumimoto Chemical. But despite these risks, Heranba continues to capture a dominant position with sound fundamentals and diversification capabilities. Therefore, we recommend investors to subscribe to this IPO for listing gains," Nirali Shah, Head- Equity Research at Samco Securities said.
However, investors should also be cautious about the prevailing market sentiment and their own liquidity before aggressively subscribing to all IPOs, she advised. The BSE Sensex shed 4.5 percent in last five consecutive sessions.
The company has zero long term debt in its book as on September 2020 and has only working capital debt to tune of Rs 38 crore. Over the period, the company has been continuously producing positive cash flow from operation, enabling smooth functioning of its operation.
Heranba plans to meet all its expansion programme (greenfield and brownfield) through its internal accrual in coming period. "Heranba has ample opportunity to expand its operation with current land, thereby lowering the capex requirement for such expansion. It is also expanding its footprint in highly regulated market of US and Europe," said KR Choksey.
The crop protection chemical manufacturer has a network of around 9,400 dealers and access to 21 depots and caters to 16 states and one union territory of India. It currently has 3 manufacturing and packaging facilities in and around the industrial belt of Vapi, Gujarat.
Heranba has in-house R&D team for product development and improvisation. Its R&D facilities at Unit I and II are recognized by the Department of Scientific and Industrial Research, Ministry of Science & Technology, Government of India (DSIR) and its new R&D facility at Unit III, Sarigam has become operational from October 2020.
The company's International distribution partners have obtained registrations for 371 products in 41 countries across the Middle East, CIS, Asia, South East Asia and Africa. Further, 172 of the company's products have been filed by its overseas customers, which are pending for registration.
It has 18 technicals registered for manufacturing and sales in India, 167 formulation registered for sales in India and 93 technicals & formulation registered for manufacturing and sales in export markets.
But before subscribing the issue, investors also need to take the note of some key risks and concerns highlighted by brokerages.
"a) There are outstanding legal proceedings involving the company, promoters and certain directors, (b) Absence of large customers and dependence on smaller customers increases uncertainty of demand which may have an adverse impact on the business operations and financial performance, (c) Company has not entered into long-term agreements with the customers for purchasing the products nor for the supply of raw materials with the suppliers," said Angel Broking.
The raw materials constitute a significant percentage of company's total expenses. Any increase in prices and any decrease in the supply would adversely affect company’s business, KR Choksey feels.
The major portion of IPO consists an offer for sale (Rs 565.2 crore of total IPO of Rs 625 crore), which is also concern pointed by the brokerage.
The strict regulations of environmental matters, delay in product approvals, and dependency on China are some of risks and concerns highlighted by ICICI Direct.
The agrochemical intermediates industry is subject to strict regulations with respect to a range of environmental matters. The company’s manufacturing facilities are being inspected on regular basis by the Gujarat Pollution Control Board (GPCB). In the past, the company has received temporary closure notices from GPCB for its manufacturing units on inspection by GPCB officials. However, it was revoked post rectifying lapses.
In first half of FY21, the company reported 14.71 percent of revenues from China. It imported 13.45 percent of raw materials from China during same period. "Any restrictions, either from the central or state governments of India, or from China, on such exports or import may adversely affect business, prospects, financial condition and results of operations," said ICICI Direct.
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