Heranba IPO – An Entryway Into The Agrochemicals Space?

By: Tavaga Research

Heranba Industries Limited, a leading agrochemical manufacturer in the country, has launched its IPO at a price band of INR 626 to INR 627 per share with the issue closing on Feb 25, 2021.

IPO Snapshot

* The above figures are relating to the Offer-For-Sale only. This is in addition to INR 60 crores worth of Fresh Issue available to the public and an amount of INR 187.5 crore already raised from Anchor investors on 22 Feb 2021.

About Heranba Industries

Heranba Industries Limited (or ‘Heranba’) is a manufacturer of crop protection chemicals and is based in Gujarat. This agrochemical company manufactures different types of pesticides as well as other pest control products. It was incorporated in 1992 and is one of the top producers of synthetic Pyrethroids with a share of ~20% of total production in the country. Pyrethroids have applications not just restricted to pest protection, but also across various other purposes including environmental health and animal health.

Heranba has 3 manufacturing units in Vapi, Gujarat with an aggregate capacity of ~14,000 MTPA. Its in-house R&D teams at 2 of those units are recognized by the Department of Scientific and Industrial Research (DSIR).

Objects of the issue

The funds from the offer for sale would go to the sellers whereas INR 60 crores out of Fresh issue would be used by the company mainly for:

• Funding the working capital: Heranba plans to utilize INR 50 crores out of the fresh issue to fund the working capital requirements for future orders and growth prospects.
• Funding general corporate expenses: Balance amount to be used for general corporate expenses like an expansion of manufacturing capabilities and strengthening of marketing capabilities.

Industry Overview

Heranba is a leader in Pyrethroids which is a cost-effective alternative to traditional insecticides and offers various other benefits being bio-degradable and less poisonous.

Overall, the Agrochemicals market stands at USD ~ 66 Bn and had a CAGR of ~1% during 2014-19. Within agrochemicals, the Pyrethroids market in India grew at a CAGR of ~7% for the same period.

Market experts forecast the overall agrochemical industry to grow at a CAGR of ~4% and the Indian Pyrethroids market to grow at a CAGR of ~20% for the period 2020-25.

Before taking a decision on whether or not to subscribe to the IPO, please find below the things that work and don’t work in favor of Heranba Industries:

Positives

• Diversified customer base: Even the aggregate of top 10 customers is well below 25% of the total sales making the sales quite diversified.
• Good margins: Heranba’s margins are pretty good relative to the competitors. (comparison table in next section)
• Export Potential: Export revenue which stood at INR 469 crores for FY 2019-20, represents ~49% of the Total Sales. Further, the Government of India with its Agricultural Export Policy is aiming to expand exports to ~USD 60 Bn by 2022 and hence could prove to be favorable for Heranba which already has a global presence.

Negatives

• Dependency on China: Heranba has a substantial portion of its revenues coming from China which formed ~ 13% of the Total Revenues in FY 2019-20. Also, ~13% of Total Raw Materials were purchased from China in the same year. This makes it somewhat dependent on China and the Indo-Chinese Trade relationships.
• Health Hazards And Food Safety Issues: Certain activists raised concerns against the use of crop protection chemicals alleging negative impacts on food safety and the environment. These could impact Heranba’s formulation business. Further, Pesticides and Insecticides have potential health hazards among humans.
• Significant Raw Material costs: The company faces a high risk due to dependency on Raw Materials which form ~70 percent of its total income. Thus any price fluctuation in raw material prices could have a significant impact on profitability.
• High Working Capital Requirements: Estimated to be INR ~ 310 crores for FY 2020-21, the working capital requirement seems to be high. This is also the major reason behind the fresh issue.

Financial Snapshot

With a significant share in the Pyrethroids market in India and good margins compared to the competitors, the current IPO price with a P/E Ratio of ~25 seem to be reasonable for Heranba.

Disclaimer: The above report should not be considered as a recommendation to subscribe to the IPO