The initial public offer (IPO) for India’s second largest manufacturer of non-urea fertilisers and di-ammonium phosphates (DAP) in the private sector, Paradeep Phosphates Ltd, opens for subscription today.
Incorporated in December 1981, the company is primarily engaged in manufacturing, trading, distribution and sales of a variety of complex fertilisers such as DAP, three grades of Nitrogen-Phosphorus-Potassium (NPK), namely NPK-10, NPK-12 and NP-20, Zypmite, Phospho-gypsum and Hydroflorosilicic Acid (HFSA).
The company is also engaged in the trading, distribution and sales of Muriate of Potash (MOP), Ammonia, Speciality Plant Nutrients (SPN) and City compost. Their fertilisers are marketed under some of the key brand names in the market ‘Jai Kisaan – Navratna’ and ‘Navratna’.
About the offer
The company aims to mop up Rs 1,501 crore by a combination of fresh issue of equity shares aggregating upto Rs 1,004 crore and an offer for sale (OFS) of 118,507,493 equity shares of Rs 10 each aggregating up to Rs 497.73 crore. The OFS comprises 6.02 million shares by Zuari Maroc Phosphates Pvt Ltd (ZMPPL), a joint venture of Zuari Agro Chemicals and OCP Group SA, up to 112.49 million shares by the government. ZMPPL has 80.45 percent stake, while the government holds around 19.55 percent stake in the company.
The price band for the offer has been fixed at Rs 39-42 per equity share of face value Rs 10 each and the issue closes for booking on May 19.
Around 50 percent of the net offer will be reserved for qualified institutional buyers, 35 percent for retail investors, and the remaining 15 percent for non-institutional investors.
Brokerage recommendations
Out of the four brokerages that Moneycontrol spoke to, three had positive reviews about the prospects of the company and recommend investors to ‘subscribe’ to the public issue given its fair valuations compared to its peers.
Over FY19-21, Paradeep Phosphates Ltd reported a decent growth in the business with almost stable profitability. Mainly on the back of higher trading business in FY21, the company reported an 8.9 percent 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 percent CAGR in consolidated EBITDA to Rs 542.2cr in FY21. Lower finance cost and effective tax rate, led to a 18.5 percent CAGR in reported PAT to Rs 223.3cr in FY21 while PAT margin expanded by 68 bps to 4.3 percent in FY21.
According to the IPO note of the company, it has reported positive cash flows in FY20 and FY21 with an average operating cash flow in the last two fiscal at Rs 1,385 crore. Financial liabilities declined by 35.8 percent CAGR with debt-to-equity ratio improving from 2.2x in FY19 to 0.7x in FY21.
"With the company in midst of installing an evaporator to increase the inhouse production of strong phosphoric acid and increase in the phosphoric acid production capacity to 1500 TPD, the extent of backward integration will further improve, leading to improvement in the contribution margins,” a report from BP Equities Pvt Ltd said.
“At the upper end of the price band, the issue is valued at a P/E of 7x based on FY22 annualised earnings, which we believe is reasonably priced,” the brokerage added in its report. Hence, it recommends a ‘subscribe’ rating on this issue for the long term.
The brokerage firm Choice Broking highlights that the company faces risks from its dependence of business on seasonal fluctuations and climatic variations. Unfavorable government policies and regulations and delay in receiving the subsidy payments from the government could add unwanted pressure on the business.
Unfavorable sales-mix, unfavourable fertiliser prices and cost of production and additional competition are the other risks that the company is prone to.
“At higher price band of Rs 42, the company is demanding an FY21 EV/Sales multiple of 0.7x, which is at significant discount to the peer average of 1.1x,” a report from Choice Broking said. Considering the above observations, it assigns a ‘subscribe’ rating for the issue.
“Paradeep Phosphates will trade at a valuation of 5x PE multiple based on annualized EPS of FY22E on upper price band & 15.3x PE multiple based on FY21 earnings,” Dalal & Broacha Stock Broking Pvt Ltd said.
The brokerage added that the company’s return rations are lower compared to peers (ROE@12 percent as against an industry average of more than 20 percent), it has mediocre EBITDA and PAT margins but is relatively fairly valued compared to peers which leaves some room for listing gains. It recommends investors to ‘subscribe to the issue for listing gains’.
That said, the brokerage firm, Angel One has a ‘neutral’ rating for the issue due to the fact that the company is valued in line with peers and likely to face headwinds in terms of cost pressures due to recent increase in raw material prices.
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