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India Pesticide Limited IPO: Will It Benefit From The Chemical Bull-Run?

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By: Tavaga Research

Chemical companies are flourishing this season. Lucknow-based India Pesticides Limited is ready to launch its IPO as the Agrochemical manufacturer aims to fund its working capital requirement and enhance its brand visibility. It opened for subscription on 23rd June 2021 and will remain open till 25th June 2021. The price band for the IPO is between Rs.290 and Rs.296.

IPO Snapshot

Shareholding Pattern of Indian Pesticide Limited

Objective of the Issue

The basic objective of the issue is for financing the working capital requirement of the business. The remaining will be used for general corporate issues. 

Industry Overview

The Indian crop protection market is expected to grow to $5.7bn by 2024 from the current $4.2bn, while the exports are expected to form around 55 percent of this market. The need for an increase in crop yield and providing farmers with better remuneration are the important factors that are giving impetus to this sector. 

The supply chain disruption caused by Covid has influenced the reduction of imports from China, wherein, India is being looked upon for the supply of Technicals and Formulations due to technical expertise and low labour costs. The government is also encouraging domestic manufacturing of active ingredients to cut reliance on imports from China.

Company Overview

India Pesticides Limited was incorporated in 1984 and it is one of the leading agrochemicals manufacturers in India. It operates majorly in two business verticals, Technicals and Formulations. It is the sole Indian manufacturer of five Technicals and global leader of few formulations. 

They manufacture generic Technicals that are used in the manufacture of fungicides, herbicides, and Active Pharmaceutical Ingredients (APIs) with applications in dermatological products. They manufacture and sell over 30 Formulations that are ready-to-use products. 

Its Technicals are majorly exported to major countries. However, agrochemical Formulations are primarily sold to domestic crop protection manufacturers like Syngentia Asia Pte Ltd, UPL Ltd, Sharda Cropchem Limited, etc. 

Currently, the firm has two manufacturing plants at Lucknow and Hardoi, Uttar Pradesh. They have a strategic focus on R&D and capabilities which include two well-equipped in-house laboratories registered with DSIR.

Financials

The Agrochemicals business is a business with a high working capital requirement. The main objective of an IPO is to finance the extra working capital requirements. The borrowings are minimal and have provided strong revenue growth.

Peer Comparison

The major competitors for the company are PI Industries, Bharat Rasayan, Sumitomo Chemical, Rallis India, and Dhanuka Agritech Limited. The management of the company at the IPO meet said their jump in EBITDA margins is driven by improvement in yield, which is permanent.

The Balancing Act 

Positives

Negatives

· The products are required to obtain regulatory pre-approval for manufacturing of the products which is both time and cost constraint.

· They face competition from both domestic and multinational corporations which is the major threat. 

· The company is subject to regular inspections, technical specifications, quality requirements, and audits by customers and government. 

· Majority of their revenue is from exports which can affect the business if any changes in tariffs. 

· Specific raw materials and finished goods are flammable and require specialized storage, failing which they may be exposed to industrial accidents. 

· The Agrochemicals business is working capital intensive. If they experience insufficient cash flows or are unable to borrow, it may affect business and operations. 

· Agrochemicals business is subject to cropping patterns and climatic conditions. Seasonal variations, unfavourable local and global weather patterns may affect the business. 

· There is growing consumption of bio-pesticides. The adoption of bio-pesticides may affect the competitive position. 

Grey Market Premium 

As per news reports, Indian Pesticides Limited was trading at a massive 34 percent grey market premium. The shares were available at a premium of Rs. 100 i.e. a price of Rs 396. 

What can investors expect?

The agrochemical industry in India has a great future due to supply chain disruptions with China on account of Covid-19 and incentive programs by the government for manufacturing activities. Also the need for an increase in crop yield could be an added advantage. The management is well aware of their business. 

However, there is competition from both domestic and international companies. Bio-pesticides are making their small footsteps in the Agrochemical industry, though it is in its nascent stage it can be a major threat in the future. 

The working capital cycle of the company is more than three months, which is much higher than the industry average. The government of India last year proposed a ban on 27 pesticides which included Captan and Ziram, which are the major molecules produced by the company and could affect the profit margins of the company. 

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