CULTIVATE INVESTMENTS

Sharda Cropchem (Sharda) an export-oriented crop protection chemical company will hit the capital market on 5th of September with its initial public offer (IPO). The price band at which company is offring its share is Rs. 145-156 and aims to raise Rs. 352 crore at upper price band. Sharda is engaged in the marketing and distribution of a wide range of formulations and generic active ingredients globally. They are also involved in order based procurement and supply of belts, general, chemicals, dyes and dye intermediates. Over the years the company has primarily, grown organically. The company has an asset-light business model whereby it focuses on identifying generic molecules, preparing dossiers, seeking registrations, marketing and distributing formulations through third-party distributors or its own sales force. The main objective of the issue is to enhance brand value and provide liquidity to existing share holders. There is no fresh issue of equity shares and promoters and institutional holder (i.e. HEP Mauritius) will offer their share holdings for sale.

The company owns over 1040 registrations for formulations and over 155 registrations of for generic active ingredients across Europe, Latin America and rest of the world. As of August 2014, it has filed over 500 applications for seeking registrations globally which are pending at different stages.

In FY14, around 90 per cent of sales were incurred through the third-party distribution network while the remaining 10 per cent took place through utilising its own sales force. Since 2010, the company has increased its own sales force to over 100 personnel globally including India and will continue to focus on increasing its own sales force in addition to third party distributors. The increase in own sales force is also expected to augment the operating margins for the company.

The company has consistent track record with topline and bottomline have grown at a CAGR of 22.1 per cent and 38.6 per cent, respectively, in FY10-14. The company primarily operates in two segments namely agro chemical, which contributed 82.5 per cent to the operating revenue in FY14 and conveyor belt business that contributed 15.8 per cent, and other business (dyes) contributed 1.7 per cent. Geographically, the export sales accounted for 97 per cent and remaining three per cent was attributable to domestic market.

Sharda is a debt free company thus it has the ability to leverage the balance sheet in future. The company has robust balance sheet with attractive ratios. It has strong return on capital employed (RoCE) of 25 per cent and return on equity (RoE) of close to 20 per cent. The net working capital days have also improved over the last four years by net working capital days decline to 99 days in FY14 from 143 days in FY10.

Coming to valuation at higher price band the company is available at a P/E of 13.2x post issue equity share which look at reasonable valuation. Comparing Sharda with Indian players like Rallis India, PI Industries, UPL Limited, Dhanuka Agritech and Insecticides India who are engaged in both manufacturing as well as trading of agro chemicals, the company’s valuations seems to be impressive (peer group trading at 12 months TTM of 24.3x P/E). Further, the company’s asset-light business model and focus on registration of the molecules make its business strategy unique as compared with its peers those have a capital-intensive business model.

Looking at the company’s fundamental and valuation we believe the subscriber should invest with a long term investment perspective.