IPO Analysis: Paradeep Phospates Ltd

IPO Rating: Invest for long-term

About the issue:

The company is primarily engaged in manufacturing, trading, distribution and sales of a variety of complex fertilizers. It is coming out with its initial public offering (IPO) of equity shares of the face value of Rs 10 per equity share. The maiden offer comprises of fresh issue of Rs 1,004 crore and offer for sale by existing shareholders of Rs 497.73 crore, according to its red herring prospectus. The price band of the issue has been fixed at Rs 39 to Rs 42 per equity share. The IPO opening date is May 17, 2022, and it will be closing on May 19, 2022. The issue will be listed on the exchange on May 27, 2022. The IPO market lot size is 350 shares. A retail-individual investor can apply for up to a maximum of 13 lots (4550 shares or Rs 191,100). 

The objects of the issue are:

• Part-financing the acquisition of the Goa facility.
• Repayment/prepayment of certain of our borrowings.
• General corporate purposes.

Paradeep Phosphates IPO Details

About the company:

Incorporated in 1981, Paradeep Phosphates Limited is a manufacturer of non-urea fertilizers in India. The company is engaged in manufacturing, trading, distribution and sales of a variety of complex fertilizers such as DAP, three grades of Nitrogen-Phosphorus-Potassium (namely NPK-10, NPK-12 and NP-20), Zypmite, Phospho-gypsum and Hydroflorosilicic Acid.

Paradeep Phosphates Limited is the second-largest private sector manufacturer of non-urea fertilizers and Di-Ammonium Phosphate (DAP) in terms of volume sales for the nine months ended December 31, 2021. The company's fertilizers are marketed under the brand names Jai Kisaan-Navratna and Navratna.

The manufacturing facility of Paradeep Phosphates Limited is located in Paradeep, Odisha, and includes a DAP and NPK production facility, a Sulphuric acid production plant and a Phosphoric acid production plant. The facility can store up to 120,000 MT, 65,000 MT, 55,000 MT and 35,000 MT of Phosphate Rock, Phosphoric acid, Sulphur and MOP, respectively.

The company established an extensive sales and distribution network, with a strong presence in the eastern part of India. As of March 31, 2022, Paradeep Phosphates distributed products across 14 states in India through the network of 11 regional marketing offices and 468 stock points.

As of March 31, 2022, the company's network includes 4,761 dealers and over 67,150 retailers serving over five million farmers in India.

Competitive Strengths

Well-positioned to capture favourable Indian fertilizer industry dynamics supported by conducive government regulations.

The second largest manufacturer of Phosphatic fertilizers in India.

Driving raw material efficiency through backward integration of facilities and effective sourcing.

Secure and certified manufacturing facility and infrastructure and unutilised land available for expansion.

The strategic location of our manufacturing facility and sizeable material storage, handling and port facilities.

Established brand name backed by an extensive sales and distribution network.

Strong parentage, experienced management team and prominent shareholders.

Company Financials:

For the period from FY19 to FY21, the revenues of the company have grown with a CAGR of 8.57 per cent. EBITDA for the nine months ended December 31, 2021 and the Financial Years 2021, 2020 and 2019 was Rs 5,930.57 million, Rs 5,612.56 million, Rs 4,938.29 million and Rs 4,807.48 million, respectively. It has grown with a CAGR of 8.05 per cent from FY19 to FY21. The EBITDA margin is at 10.8 per cent in FY21, which is almost the same as FY19. The PAT has grown with a CAGR of 18.5 per cent for the same period but the PAT margin is low at 4.3 per cent.

Recommendation:

According to CRISIL report, among private sector entities with a focus on the non-urea segment, it is the second largest in terms of phosphatic fertilizer (DAP and NPK complexes) capacity, as of March 31, 2022. The company’s primary raw materials include Phosphate Rock, Phosphoric acid, Ammonia, Sulphur and MOP. In order to ensure a stable supply of our most important raw material by value, Phosphate Rock, on January 1, 2021, it entered into a long-term supply agreement with OCP for the procurement of Phosphate Rock for a term of three years, expiring on December 31, 2023, and which may be automatically renewed for successive periods of two years. In addition, it has backward integrated our manufacturing process by producing the two other key raw materials by value, Phosphoric acid and Sulphuric acid.

As of March 31, 2022, it also owns large parcels of land aggregating to approximately 2,282.42 acres in Paradeep, Odisha. Its existing manufacturing facility is constructed on approximately 33 per cent of such land parcels. Accordingly, it has the ability to further significantly expand its facilities on the remaining portion of the land parcel.

Further, upon acquisition of the Goa facility, it will gain access to its Ammonia production plant, Urea production plant and combined NPK production plant. It will also gain access to its robust outbound facilities, captive power plants, storage for raw material and finished goods as well as a bagging plant. This is expected to allow it to scale its operations and increase its manufacturing capabilities. Further, it will be able to achieve higher efficiency by reducing product changeovers by making product trains exclusive to one or two variants.

Talking about the valuations of the company, the asking P/E with the annualized earnings of nine months ended December 2021 earnings, stands at 7.07 times which is cheaper than the industry average of 11.75. We recommend to invest in the IPO for long-term.