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India Pesticides

• India Pesticides is coming out with a 100% book building; initial public offering (IPO) of 2,75,86,206 shares in a price band Rs 290-296 per equity share.

• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.

• The issue will open for subscription on June 23, 2021 and will close on June 25, 2021.

• The shares will be listed on BSE as well as NSE.

• The face value of the share is Rs 10 and is priced 29 times of its face value on the lower side and 29.60 times on the higher side.

• Book running lead managers to the issue are Axis Capital and JM Financial.

• Compliance Officer for the issue is Ajeet Pandey.

Profile of the company

The company is an R&D driven agro-chemical manufacturer of Technicals with a growing Formulations business. It is one of the fastest growing agro-chemicals company in terms of volume of Technicals manufactured. It has recorded 37.17% year-on-year growth in Technicals manufacturing (by volume) between Fiscal 2020 and Fiscal 2021, reaching more than 75% plant operating rate. It is the sole Indian manufacturer of five Technicals and among the leading manufacturers globally for Captan, Folpet and Thiocarbamate Herbicide, in terms of production capacity. Since commencing its operations in 1984, it has diversified into manufacturing herbicide and fungicide Technicals and active pharmaceutical ingredients (APIs). It also manufactures herbicide, insecticide and fungicide Formulations. It has a strategic focus on R&D and its R&D capabilities include two well-equipped in-house laboratories registered with the DSIR. Its efforts are led by a dedicated R&D team that comprises PhDs, masters graduates in chemistry and abiotechnological engineer. Its R&D efforts have led to development of processes to manufacture three generic off-patent Technicals since Fiscal 2018 and it is currently in the process of developing processes for certain Technicals, including two fungicides, two herbicides, two insecticides and two intermediates.

The company currently have two manufacturing facilities located at UPSIDC Industrial Area at Dewa Road, Lucknow and Sandila, Hardoi in Uttar Pradesh, India that are spread across over 25 acres. Each of its manufacturing facilities has the ability to manufacture a wide range of products, which provides it with the flexibility to cater to changing demands in the market, thereby reducing dependence on any one major product category. It also has pilot facilities to test commercialization of its products. Its facilities are periodically audited and appraised by its customers including various multinational corporations. It has also commenced construction of two manufacturing units at its Sandila facility, which are proposed to be used for herbicide Technicals.

Proceed is being used for:

• Funding working capital requirements of company.

• General corporate purposes.

Industry overview

India crop protection chemicals exports have grown at an approximate CAGR of 9% during the years 2015 to 2019. The actual export contribution of crop protection chemicals was 50% of total domestic production (by value) in 2019. Exports are projected to grow to approximately 55% in 2024, in terms of value. In 2024, exports are expected to grow to $3.1 billion contributing 55% of total domestic production which is expected to be valued at $5.7 billion. India was the world’s third largest pesticide exporter by volume in 2018. China leads the exports of pesticides with 27% of market share in the world exports, followed by Germany (8.3%), India (8%), United States, Belgium and France. India has been ranked fourth globally in the production of agrochemicals (crop protection chemicals/ pesticides) after the United States, Japan and China, as per India Brand Equity Foundation Report 2019. The domestic Indian crop protection chemicals market is valued at $2.1 billion which is expected to grow at 4% in the next five years to $2.6 billion by 2024. India has one of the lowest per capita consumptions of crop protection chemicals per hectare, which suggests, there is a significant scope of growth for the crop protection chemicals in India, increasing agricultural productivity and compensating the shortage of farm labour by extensive use of herbicides.

APIs are substances or a mixture of substances intended to be used in the manufacture of a drug (medicinal) product and that when used in the production of a drug becomes an active ingredient of the drug/ product. The Indian API market has shown steady growth of 8% since Fiscal 2016 and is expected to further expand due to an increased focus on new geographies in the global pharmaceutical industry, the change to the specialty segment and strong domestic demand. More than 30% of the APIs manufactured in India are exported to countries such as US, UK and Japan. The market for pharmaceutical intermediates in India for 2019 was estimated to be approximately US$ 4.5 billion, growing at a CAGR of 8% during 2014 to 2019. At a CAGR of approximately 10% from Fiscal 2016 to Fiscal 2024, the Indian API domestic consumption market is expected to grow substantially. In addition, the Government of India is taking various initiatives to increase the industry, such as, allocating land in different states to develop API mega parks and increasing investment in research and development.

Pros and strengths

Strong R&D and product development capabilities: The company has substantial experience in undertaking R&D activities as part of its manufacturing operations. Its R&D places significant emphasis on identification of appropriate complex Technicals that are suitable for commercialization, improving its production processes and the quality and purity of its present products and manufacturing new off-patent products. Its R&D team comprises PhDs, masters graduates in chemistry and a biotechnological engineer. It has two well-equipped R&D laboratories, each of which is registered with the DSIR. Its laboratories are equipped with sophisticated equipment that include gas chromatography–mass spectrometry and high-performance liquid chromatography machines, particle size analyzers, PH meters, Karl Fischer titrators, conductivity meters, melting point apparatus and water purification systems. Its analytical capabilities include critical quality control measures, non GLP-5 batch analysis, stability studies, method validation and method development. Its R&D efforts also focus on determining the optimal production process for the Technicals it manufacture and the reduction of energy consumption.

Diversified portfolio of niche and quality specialized products: The company’s product portfolio comprises primarily of products that it manufactures in-house allowing it to cater to a wide range of customers in both domestic and international markets. It has obtained registrations from the CIBRC for 22 agro-chemical Technicals and 125 Formulations for sale in India and 27 agro-chemical Technicals and 35 Formulations for export while it has a license to manufacture from the Department of Agriculture, Uttar Pradesh for 49 agro-chemical Technicals and 158 Formulations. Its products are exported to regulated markets including Australia and other countries located in Europe, Africa and Asia and has received product registrations either through its customers or by it. It commenced manufacturing of Technicals for herbicides in 2018 that are exported which has led to an increase in its EBITDA margins from 21.61% in Fiscal 2020 to 29.20% in Fiscal 2021.

Long-term relationship with key customers: The company has developed strong and long-term relationships with various multinational corporations that has helped it expand its product offerings and geographic reach for its Technicals business. India is currently the fourth largest producer of crop protection chemicals in the world. Multinationals across the globe are taking advantage of cost-effective manufacturing in India along with availability of skilled labour. India is expected to emerge as an export hub for the crop protection chemicals manufacturing, which will be exported to developed and developing economies around the world. Its major customers include multinational corporations that look to collaborate with active ingredient manufacturers in India, leveraging their cost effective manufacturing supported by cheaper labour force and stronger R&D capabilities. 

Advanced manufacturing facilities with focus on environment, health and safety: The company’s manufacturing facilities at Dewa Road, Lucknow and Sandila, Hardoi in Uttar Pradesh have an aggregate installed capacity for agro-chemical Technicals of 19,500 MT and Formulations of 6,500 MT, as of March 31, 2021 and are spread across over 25 acres. Further, it has obtained permission from the MoEF to expand its manufacturing capacity at Sandila to up to 30,000 MT. Its manufacturing facilities at Dewa Road are ISO 9001: 2015, ISO 14001:2015, ISO 10002: 2018, and ISO 45001: 2018 (OHSAS) certified and at Sandila are ISO 9001: 2015, ISO 14001: 2015, ISO 10002: 2018 and OHSAS 18001: 2007 certified for quality management system, environment management system, customer satisfaction and complaint management system, and occupational health and safety management system, respectively. An audit and review process is also undertaken by certain of its customers, which may involve inspection of its manufacturing facilities and equipment, review of the manufacturing processes and raw materials, technical review of the specification of the proposed product, review of its logistical capabilities, and inspections and reviews of prototypes of the product.

Risks and concerns

Requires significant amount of working capital: The company’s business requires significant amount of working capital primarily as a considerable amount of time passes between purchase of raw materials and sale of its finished products. As a result, it is required to maintain sufficient stock at all times in order to meet manufacturing requirements, thus increasing its storage and working capital requirements. Consequently, there could be situations where the total funds available may not be sufficient to fulfil its commitments, and hence it may need to incur additional indebtedness in the future, or utilize internal accruals to satisfy its working capital needs. Further, it requires a substantial amount of capital and will continue to incur significant expenditure in maintaining and growing its existing infrastructure.

Agro-chemicals business subject to climatic conditions: The company is engaged in the manufacture of agro-chemical Technicals and Formulations, and as a result, its business is sensitive to weather conditions such as drought, floods, cyclones and natural disasters, as well as events such as pest infestations. The weather can affect the presence of disease and pest infestations in the short term on a regional basis, and accordingly, may adversely affect the demand for crop protection products. Its results of operations are significantly affected by weather conditions in the agricultural regions in which its products are used. The most important determinant of its sales is the volume of crops planted. Adverse conditions early in the season, especially drought conditions, can result in significantly lower than normal plantings of crops and therefore lower demand for crop protection products. Further, the sales of agro-chemical products are seasonal due to monsoon with the demand for pesticides generally higher during the monsoon season in India and other jurisdictions where its products are exported. Lack of monsoon in a particular year may result in the decline in demand for its products.

Depend on success of relationships with customers: The company has developed strong and long-term relationships with various multinational corporations that has helped it expand its product offerings and geographic reach. Accordingly, it is dependent on its arrangements with such multinational corporations and its business depends on the continuity of its relationship with these customers. It has established relationships with its customers many of whom have been associated with the company for over 10 years. There can be no assurance that its significant customers in the past will continue to place similar orders with it in the future. A significant decrease in business from any such key customer, whether due to circumstances specific to such customer or adverse market conditions affecting the agro-chemical industry or the economic environment generally, such as the COVID-19 pandemic, may materially and adversely affect its business, results of operations and financial condition.

Derive significant portion of revenues from operations from limited number of markets: The company has historically derived a significant portion of its revenues from operations from a limited number of markets, namely, Australia, Europe and Asia. In Fiscals 2019, 2020 and 2021, it derived 10.19%, 30.48% and 35.41% of its revenues from sale of products from business in Australia, 22.88%, 21.24% and 14.65% of its revenues from sale of products from business in Europe, and 60.33%,43.54% and 46.33% of its revenues from sale of products from business in Asia (including India), respectively while it derived 10.51%, 5.85% and 4.01% of its revenues from sale of products from business in Asia (excluding India). Its revenues from these markets may decline as a result of increased competition, regulatory action, pricing pressures, fluctuations in the demand for or supply of its products or services, or the outbreak of an infectious disease, such as the COVID-19 pandemic. Its failure to effectively react to these situations or to successfully introduce new products or services in these markets could adversely affect its business, prospects, results of operations and financial condition.

Outlook

Incorporated in 1984, India Pesticides (IPL) is one of the leading agrochemicals manufacturers in India. The company operates in two business verticals; Technicals and Formulations. It manufactures herbicide, fungicide Technicals, and Active Pharmaceuticals Ingredients (APIs). It is the sole Indian manufacturer of several Technicals i.e. Folpet, Thiocarbamate, and Herbicide. The company also manufactures 30 plus formulations of insecticides, fungicides, and herbicides. It currently has two manufacturing facilities located at UPSIDC Industrial Area at Dewa Road, Lucknow and Sandila, Hardoi in Uttar Pradesh, India that are spread across over 25 acres. It has demonstrated consistent growth in terms of revenues and profitability over the last three Fiscals. It is assisted by experienced team of personnel including an organic chemist, an agronomist, a project advisor, and advisors on environmental and toxicological studies. On the concern side, the company relies and will continue to rely to a significant extent on the relationships it has with its distributors and dealers. It continuously seek to increase the penetration of its products by appointing new distributors and dealers targeted at different customer groups and geographies. Besides, any changes in Government policies relating to the agriculture sector such as the reduction of government expenditure towards agriculture, the withdrawal of or changes in incentives and subsidies provided to farmers, export restrictions on crops, adverse changes in commodity prices or minimum support prices could affect the ability of farmers to spend on crop protection products, which in turn could adversely affect its business and results of operations.

The issue has been offered in a price band of Rs 290-296 per equity share. The aggregate size of the offer is around Rs 799.99 crore to Rs 816.55 crore based on lower and upper price band respectively. On the performance front, total income increased by 33.82% from Rs 4,897.27 million in Fiscal 2020 to Rs 6,553.77 million in Fiscal 2021. It has recorded a profit for the period of Rs 1,345.11 million in Fiscal 2021 compared to Rs 707.99 million in Fiscal 2020. The company intends to continue to expand its product portfolio by manufacturing complex off-patented Technicals. It also intends to continue to leverage its R&D capabilities and manufacturing expertise and focus its investment in process innovation. In particular, it plans to continue to focus on investing in automation, modern technology and equipment to continually improve the processes to manufacture its products and address changing customer preferences.