Issue opens: Friday, September 5, 2014
Issue closes: Tuesday, September 9, 2014
Face Value – Rs.10
Price Band – Rs.145 to Rs.156
Bid Lot – 90 Equity shares and in multiples thereon.
Valuation and Investment Rationale
The Initial Public Offer is having a price band of Rs.145 on the lower side and Rs.156 on the higher side. At an earnings per share of Rs.11.85 for FY 2013-14 the Price to Earnings ratio lies in the range of 12 to 13. Therefore the IPO is priced at 12x its earnings per share on the lower side of the price band at Rs.145 per share and 13x its earnings per share on the higher side of the price band at Rs.156 per share.
The IPO price seems to be reasonable in terms of valuations but given the muted growth in the FY 2013-14 there is no clarity on what kind of growth can the company achieve in the next five years.
The Sale proceeds of the company would be used for the Selling Shareholders and none of it would go to the Company.
Sharda Cropchem Limited, a crop protection chemical company engaged in the marketing and distribution of a wide range of formulations and generic active ingredients globally.
Competitors of Sharada Cropchem Ltd. viz. UPL and Excel Crop Care appear to be more technically and economically efficient in terms of working capital and research and development aspects of the business. The company outsources the research and development work for identified generics and molecules to third parties.
The issue size is Rs.22.5 million shares with a face value of Rs.10 with Rs.3270 million on the lower price of the price band and Rs.3518.6 million on the higher price of the price band. The retail segment has been allocated not more than Rs.1144.6 million on the lower price of the price band and Rs.1231.5 million on the higher price of the price band for the issue. The issue size is relatively small and allotment would happen on a random basis if the issue is oversubscribed.
The IPO will do well given that market environment is positive. Listing gains too is on the cards, however oversubscription will be high. The share sale proceeds is not going to the company but to investors selling their stake. On listing, if the valuations are not too high, investors with appetite for agro chemcial stocks can look to invest to ride a two to three year growth cycle.
Company Business Overview
Sharda Cropchem Limited, a crop protection chemical company engaged in the marketing and distribution of a wide range of formulations and generic active ingredients globally. It is also involved in order based procurement and supply of Belts, general chemicals, dyes and dye intermediates. Over the years, they have, primarily, grown organically and their core strength lies in identifying generic molecules, preparing dossiers, seeking registrations, marketing and distributing formulations or generic active ingredients in fungicide, herbicide and insecticide segments. They have also recently entered into the biocide segment and have acquired several registrations from the existing registration holders, primarily, in Europe.
They began their operations through two sole proprietary firms, each set up by Ramprakash V. Bubna and Sharda R. Bubna. After the incorporation as Sharda Worldwide Exports Private Limited in 2004, the generic agrochemical business and non-agrochemical business conducted by both firms was transferred to the Company. Subsequently, they started seeking registrations inorganically by acquiring registrations from third parties, primarily in Europe. Over the years, they have focused on organic growth and have invested substantially in preparing dossiers and seeking registrations in their own name.
A typical agrochemical value chain consists of the following key activities: (a) basic and applied research, (b) identification of new product and registration opportunities, (c) seeking registrations, (d) manufacture of the active ingredient, (e) formulation and packaging, and (f) marketing and distribution. In the value chain, they have adopted an asset light business model whereby the focus is strongly on identification of generic molecules and registration opportunities, preparing dossiers and seeking registrations for formulations and generic active ingredients. They procure formulations and generic active ingredients in their finished form from third party manufacturers for onward sale. They also procure generic active ingredients for preparation and sale of formulations wherein they outsource the process of preparation of formulations to third party formulators. This enables to offer diversified range of formulations and generic active ingredients in fungicide, herbicide and insecticide segments for protecting different kind of crops as well as serve turf and specialty markets and in biocide segment as disinfectants, thereby catering to varied market demand.
Risks Relating to the Business
Genetically Modified Seeds technology business can pose a threat to the revenues for the Agrochemical suppliers as higher tendency to resist pest attacks by the seeds reduces the need to use agrochemicals for the crop.
The Total Consolidated Revenue has grown at a CAGR of 23% from Rs.3559.1 million in FY 2009-10 to Rs.8147.39 million in FY 2013-14. The EBITDA has grown at a CAGR of 43.23% from Rs.352.56 million in FY 2009-10 to Rs.1483.66 million in FY 2013-14. The Net Profit has grown at a CAGR of 38.64% from Rs.289.36 million in FY 2009-10 to Rs.1069 million in FY 2013-14.
The EBITDA margin stands at 18.21% and the Net Profit Margin is reported to be 13.2% in FY 2013-14.
The company had no long term debt at the end of FY 2013-14.
Cash flow Statement
The Cash flow statement indicates heavy investment in acquiring product related registrations considering the available opportunity in the global agrochemicals industry. The net cash flow is negative in the FY 2013-14 period.
Crop Protection Agrochemicals Global Industry Overview
The global market for conventional crop protection products (excluding sales of herbicide tolerant and insect resistant seed, as well as non-crop agrochemicals) is estimated to have increased by 9.4% to reach USD 54,208 million during 2013.
Growth within the crop protection sector is directly linked to support for agriculture, crop commodity prices and farm incomes, however the non-crop sector is influenced more by the economic position of the major markets, with consumer purchasing being a significant factor. Growth within the Genetically Modified seed market is predominantly driven by the introduction of new technology with competition within the sector now intensifying as the number of available trait offerings continues to grow.