India Pesticides Ltd, an agrochemical company recently came out with its ₹800cr IPO which was subscribed by more than 29 times. The stock listed on the exchanges on 5th July at a premium of 20% from the IPO upper price bank of ₹296.
To be honest, I am really amazed to see the kind of specialty chemicals companies getting listed. One amongst them is India Pesticides Ltd.
To begin with, company has a number of strong entry barrier acting as a moat for India Pesticides Ltd(IPL). The moat can be easily seen visible in the business terms of the company such as:
Profit margin of about 20+% & EBITDA margin of 30+%
Long term contract of 5-7 years with 50% of its customers (Usually other chemical companies will have monthly or quarterly contracts)
Customer Contract to buy certain minimum quantities with IPL or customers need to pay at a higher price if the stipulated minimum quantity is not met (Enables them to order raw material in bulk thus negotiating on the buying price with suppliers) Unheard of in most Indian companies.
Sales of customer on FOB basis i.e. purchaser pays the shipping cost
Co. is the only manufacture of 5 technicals/active ingredients in India
Company has not lost a single customer at least in the last 10 years
Company's receivables are backed by Letter of credit
To understand more about the agri input sector, you can read my blogs:
Before we go any further, lets first understand about the agrochemical industry.
Agrochemicals Sector
Agro chemical sector is a part of agri-input market. Agri-input sector consists of Seeds, Fertilizers and Crop protection products(pesticides). All these is used in the production of crop and then protection of the same crop. In the agri value chain, agrochem is the final external stimulus provided to the plants.
Agrochemical segment is also known as Crop protection Chemical market or Pesticides market.
The business of IPL is into the generic Crop protection products(CPC)/Pesticides/Agrochemicals space.
Starting from the global perspective, Global agro-chemicals market was $62.5bn in 2019 and expected to increase to $86bn to 2024 growing at 6.6% led by demand for food security. On the other hand Indian agrochemical market is just about $2.1bn and expected to grow by 4%.
In the image below you can see the Global Agrochemical market is skewed more towards technicals having a larger pie of the market as well as witnessing higher growth.
A number of steps goes towards manufacturing CPC/pesticides/agrochemicals. The below value chain explains the ingredients/steps involved:
From the image above, India Pesticide Ltd caters to the Second step i.e. manufacturing Active Ingredient/Technicals(80% of sales) as well manufacturing Formulations(20% of sales) in the generic agrochemical market.
Technicals are the key ingredient that acts on the fungus, herbs, insects etc. Formulators then dilute these active ingredient and make is ready to use.
The growth of the generic market depends on the molecules losing patent protection. Between 2019-26, nineteen (19) technicals are expected to lose patent protection creating market of $4.2bn giving lot of growth opportunity.
India is the 4th largest manufacturer of agrochemicals in the world. Indian in general are known for their chemistry skills.
The image below explains the characteristics of Agrochemical industry:
As you can observe, technicals have moderate to high margins with high capital intensity and is also very technically intensive whereas Formulators are low capital intensive business with lot of competition.
Being integrated is much more beneficial i.e. backward integrated formulators.
Coming back , Crop protection product/Agrochemicals/formulators can be divided into 3 categories:
1. Herbicides: Weedkillers substances used to control unwanted plants.
Herbicides are majorly used in rice and wheat crops. However, due to availability of cheap labor in India those are employed to manually pull out weeds. Herbicides have seasonal demand due to the fact that weeds flourish in damp, warm weather and die in cold spells.
The increasing labor shortage issue has increased the usage of herbicides.
2. Fungicides: Fungus are the #1 cause of crop loss worldwide. Fungicides kills these fungus or their spores as well as inhibits their growth. Finds application in fruits, vegetables and rice. Fungicides play important role to reduce post-harvest losses in fruits and vegetables.
3. Insecticides: They are formulated to kill, repel or mitigate insects. Used mainly in paddy, cotton, sugarcane and other cereals.
Globally the among the 3 types of crop protection product, Herbicide and Fungicide are much more prominent due to lack of labor and insecticides is comparatively saturated. But in India due to cheaper labor availability, the market is dominated by insecticides(50% of the market) but things are changing now. Market is moving from Insecticides to fungicides & more towards herbicides.
Technicals are majorly exported from India.
About the company- India Pesticides Ltd
India Pesticides Ltd(IPL) was incorporated in 1984 by Anand Swarup Agarwal, current Chairman and non-executive Director. Its first plant came onstream in 1991.
IPL is a R&D driven agrochemical manufacturer of technicals with a growing formulation business. Company's technicals are skewed towards herbicides and fungicides which have higher growth opportunity.
Company is the sole Indian manufacturer of five Technicals(Mostly herbicide technicals) and among the leading manufacturers globally for Captan, Folpet and Thiocarbamate Herbicide, in terms of production capacity
Company ventured into herbicide technical business in 2018 and that has helped the company tremendously.
In terms of formulation business , the company has network of 20 depots and warehouses in 15 states.
IPL is one of the fastest growing agrochem companies in India.
IPL manufactures active ingredients/technical, API as well as formulations. Formulation are end product such as herbicides, fungicides and insecticides. Active ingredients or technicals are the product/chemical that gives the formulation the properties to act upon insects, weeds, fungus etc. Similarly, APIs are the product that gives drugs used in humans their required impact.
Management:
Chairman & founder of the company Mr Anand Swarup Agarwal has an experience of more than 35 yeas in the manufacturing sector. Also, both the CEO & CFO has been associated with the company for more than 25 years.
Dheeraj Kumar Jain is the CEO of the company while Satya Prakash Gupta is the CFO. In the RHP it wrongly mentions the salary of CEO as ₹15.3 lakh and that of CFO at ₹7.2lakhs. I was shocked to see such meagerly salary which the management clarified in the first concall as it being as ₹1.5cr for CEO and 72 lakhs for the CFO.
The chairman and founder, Mr Anand Swarup Agarwal is now 76 years old. In terms of succession planning, the Anand Swarup Agarwal has 2 sons, one looks after the Formulation business and the other one into technicals. Even his grandsons are now into the business. They are assisted by professional management which is the CEO,CFO and others.
Promoter group will continue to hold 76% post the IPO.
What differentiates the company's product?
Company has a profit margin of more than 20%. They must be doing something that makes this possible. The answer lies below:
1.Co focuses on COMPLEX technicals that are suitable for commercialization with large market size.
2. Co's R&D enables the co. to identify products that are higher margin and require specialized manufacturing and handling capacities.
3. Co develops alternate processes are not highly toxic(Key strength of the company). Also, company's manufacturing processes contribute towards reducing raw material consumption, solvent and water consumption resulting in reduced effluent and solid hazardous waste.
Technicals/Active ingredient in general is technologically very complex to manufacture. On top of that the company focuses on the most complex ones.
Products:
Till the time of filing the RHP, co manufactures 8 technicals , 2 APIs and 30 formulations. All of company's product cater to the generics market. Company's technical product cater to fungicide and herbicide sub-segment whereas APIs manufactured by the company are used in dermatology.
1. Technical Products:
Key fungicidal products:
1) Folpet- Controls fungal growth at vineyards, cereals, crops and biocide in paints.
2) Cymoxanil- Control downy mildews of grapes, potatoes, vegetables and several other crops.
Key herbicidal products:
1) Thiocarbamate- Used in the field of crops such as wheat, rice and are used globally.
2. APIs
Pharma APIs- Anti Scabies and anti fungal applications. Co groups API revenues in technicals and it contribute about 10% of revenue.
3. Formulation
Co manufactures and sells various formulations of insecticides, fungicides, growth regulators and acaricides which are ready to use products.
Formulations are sold in the domestic market.
India Pesticide Ltd's Brands in formulation business: Takatvar, IPL Ziram 27, IPL Dollar, IPL Soldier, IPL Guru etc. India Pesticides uses in house manufactured active ingredients/technicals to make formulation. This also enhances the margin.
In terms of revenue segmentation, company generates about 80% revenue from technicals:
As you can see in the images above, the sales is more skewed towards Technicals contributing to about 80% of sales.
Clients:
Other clients- Rallis India,
Other than regulatory bodies, the facilities are periodically audited & approved by company's customers. Prior to placing orders there are usually audit and review process undertaken by the customers. Some customers even go for laboratory validation of products post delivery. Simply put it implies customers require stringent quality requirement.
Co's customer relationship are led by company's ability to manufacture complex technicals that go off-patent. IPL has not lost a single customer in the last 10 years.
Raw materials:
Chlorine, Tetrahydro Phthalic Anhydride, Carbon di sulphide, Technical Grade urea, Di-n-propylamine, Benzyl Chloride, Thiols, etc
All these are bulk chemicals and are purchased on purchase order basis.
Co is looking to continually increase procurement of raw materials from India to lower the overall cost. Given the certain minimum confirmation by clients, it enables company to purchase raw material in bulk and thus negotiate prices better.
In addition, the company checks the raw material properties and process condition for each of the alternatives and select the relatively safer option.
Product Pricing:
Although the contracts with most customers are on a long term basis, the product pricing is decided on a quarterly or half yearly basis based on the raw material price movements. There is a lag of about a quarter in terms of any price changes by the company.
Plants & Capacities:
Company's plant are located in Uttar Pradesh in UPSIDC area at Dewa Road, Lucknow and Sandila, Hardoi (UP). Each of the company's facility can produce wide range of products(i.e. multi purpose plants) and of state of the art equipment.
Dewa road: started manufacturing in 1991
Sandila: Started manufacturing in 2015
India Pesticides Ltd is rapidly expanding its technicals capacity at Sandila from 3700MT to 17400 MT which is 5x in a matter of just 3 years.
Company is further expanding the Sandila technicals capacity by 10,000MT by construction of 2 new plants which will be used to manufacture Herbicide technicals. This will lead to higher sales and margin.
Company will be spending ₹70cr towards expansion in FY22 and ₹80cr in FY23. Taking a conservative asset turnover of 2 times, the sales is likely to increase by 300cr post 2 year of the expansion.
Both the facilities have sophisticated equipment and machinery that helps them to manufacture quality technical grade products and formulation. Also implies that manpower required would be minimized.
Company is also setting up new plant in Hamirpur, UP for which they have been allotted 25 acres of land. This new plant will be under their wholly owned subsidiary 'Shalvis Specialities Ltd'. This new entity was created to take advantage of the new tax incentive. This plant is likely to be commissioned by March 2023 and the capital expenditure here is likely to be in the tune of 300-350cr.
Financial Analysis:
India Pesticides Ltd's last 4-5 years have been exceptional with revenue growing at a CAGR of 31% between FY17-21, while margins have showed much better trend. Since 2018, the company has developed and commercialized 3 technicals for herbicides that has lead to increase in margins as well as sales growth.
Company's receivable days still is high at about 4 months which according to the management belongs to MNCs and are backed by letter of credit. Using letter to credit, co can borrow and it also guarantees receivable.
In the recent past, the company has been rapidly adding capacities that will take care of the growth aspect and the management is quite confident that they can easily maintain the current margin. Company is also consistently adding new technicals.
Growth Drivers:
1. In terms of formulation business, the company is present only in 15 states in India. India having 28 states and 8 union territories have enough room for growth.
Also, co can introduce more products i.e. increasing product portfolio to sustain the growth.
2. Co will be increasing in dealers & distribution presence.
3 .Company is rapidly increasing its capacity of technical products towards herbicide and fungicide technicals which are witnessing higher growth as well as fetches higher margins.
4. IPL is in the process of manufacturing products that will be high value and be able to address the resistive & unwanted pests and diseases.
5. Company is in the process of launching 8 new products(applied for approval for all of them) of which 2 of them were soft launched in Q1FY22 with their existing customers. One is a herbicide with a revenue potential of ₹100cr by next one year and another one is an insecticides with a revenue potential of ₹30cr by next year.
In the next 3 years, the company plans to launch a total of 16 molecules including the current 8.
6. Add new customers and increase wallet share with existing customers
7. China+1 strategy by many crop protection product manufacturer leading to increased sourcing from India.
8. In India only about 20-25% of cultivated land is treated with pesticides leaving lot of room for growth.
9. IPL is focused on technicals. Technicals have a much larger share of the total global agrochemical sector and are growing much faster than formulators.
Competition:
In terms of technical business, according to the management they do not have any direct competitors. For the formulation business, the competitors would be UPL Ltd, PI Industries, Jubilant Ingrevia, Sumitomo Chemicals & BASF.
India Pesticides Ltd growth and profitability is way better than any of its peers.
Risk
Dependence on one single customer: Top customer contribute 20% of sales.
Company's recent sales growth has been led by 3 herbicide technicals which contributed about 40% of sales in FY21
Indian govt ban on agrochemicals
Valuation
On 26th July 2017, the company is trading at an P/E ratio of 29x, Price to Sales ratio of 6x. Although it looks expensive but when you look at the peers such as Sumitomo Chemicals which trades at a a P/E of 63x and Price to sales of 8x with a profit margin of 13%.
The profit margin of IPL stands at 21% with far superior return ratios.
India Pesticides Ltd- Q1FY22 Analysis
IPL continues to have better visibility in the business and the product pipeline is strong. Company can deliver sustained growth with balanced profitability. Co has ample growth opportunity with focus on niche molecules
In the current quarter India Pesticides Ltd soft launched 2 molecules with its existing clients for the purpose of seed marketing. Full fledged growth because of these 2 molecules will be seen in Q4FY22.
During the quarter India Pesticides witnessed higher growth on account of kharif season and hence higher sales of formulation at 30% and technicals at 70%. While the breakup between domestic & export sales was 50:50 again due to higher sales in the domestic market on account of kharif season.
India Pesticides Ltd had a phenomenal Q1FY22 quarter. Revenue on a year on year basis grew by 46% whereas the Quarter on quarter revenue 28%. Operating profit margin increased to an impressive number of 32.4% from 28.8% YoY. And profit after tax margin were excellent at 24.7% compared to 20.7% YoY and 20.3% QoQ. This was due to better product mix and higher sales cause of the kharif season.
For the quarter, the company's ROE stood at 39% whereas ROCE stood at 54%.
Management in the call has assured investors that they would be able to maintain the achieved margins.
I have written a blog on Q2FY22 result, which you can read here: