The issue of Ahmedabad-based crop protection manufacturer Dharmaj Crop Guard opened yesterday. The ₹251-crore issue (at the upper end of the price band of ₹216-237 a share) consists of offer for sale by promoters of ₹35 crore and a fresh issue of ₹216 crore. The company aims to use the proceeds from the fresh issue for funding capital expenditure towards setting up of a manufacturing facility at Saykha, Bharuch, Gujarat; funding incremental working capital requirements; repayment and/or pre-payment, in full and/or part, of certain borrowings of the company, and general corporate purposes. At the upper end of the price band, the company is valued at about ₹800 crore. The company’s issue was subscribed 3 times overall on day 2 (as of November 29th morning).

Here are five things that you need to know about the company and the offer.  

Business

Incorporated in January 2015, Dharmaj is in the business of manufacturing and selling of crop protection products such as fungicides, weedicides, insecticides, plant growth regulator, micro fertilisers, and antibiotic to institutional clients as well as farmers. On the institutional business front, the company has a diversified clientele list that consists of Bharat Rasayan, Atul Ltd, Heranba Industries, Meghmani Industries, Sadik Agrochemicals and United Pesticides to name a few. Besides domestic clients, the company also exports its formulations to about 66 companies across 25 countries such as Latin America, East African countries, Middle East, and Far East Asia. The export portfolio comprises of over 154 products, that contributed about 10 per cent to FY22 revenue. However, the share of exports has fallen in April-July 2022 to 3.7 per cent of sales.  

On the retail front, the company has a pan-India distribution network spread over 17 States comprising 4,362 dealers, with supplies met through 16 stock points located across the country. The company had a portfolio of 118 branded products being sold to farmers, as of September 2022.

As of November 2022 (date of the red herring prospectus), 269 agrochemical formulations are for sale in India as well as for export and 195 agrochemical formulations are exclusively for exports. Additionally, the company has also applied for registrations of 18 agrochemical formulations and 17 agrochemical technicals from the CIB&RC, which are pending at various stages. The company has 157 trademark registrations and mostly sells bulk drugs to institutional clients.  

The company’s manufacturing facility is located at Taluka Bavla, Ahmedabad. Currently, the aggregate installed capacity of their manufacturing facility for agro-chemical formulations was 25,500 MT.  In addition, they are in the process of setting up a facility at Bharuch, Gujarat for manufacturing technicals and its intermediates for internal consumption as well as for sales in domestic and international market.  The total capex for the Gujarat facility is ₹172.8 crore, according to a techno feasibility report by Resurgent India Ltd, of which ₹104.96 crore will be funded from the IPO proceeds and the balance through additional debt.  

Strengths

The company’s Chairman and Managing Director Rameshbhai Talavia has over 28 years of experience in the agrochemical industry; his previous stints include EID Parry and Crop Life Science Ltd.  

A well-diversified clientele, across domestic and export markets, should hedge the company well against any issue in specific geographical markets or with volatility in the business performance of its clients.

The company’s track record of being able to swiftly ramp up its product portfolio to over 290 products in India, in a span of 7 years, is commendable. Backward integration – for technical and key material should help margins in the medium term. However, short term pressure on the margin is likely, given the higher fixed costs, from its capex initiatives.

Financials

In the last five years (2017-21) global agrochemical market has grown at an annualised 2.5 per cent to $68 billion as of 2021. The Indian market which grew 4.5 per cent annually between 2014-18, is expected to grow between 7.5-8.5 per cent by 2026-27. Over the last three years (FY20-22), the company’s operating revenue has grown at an annualised rate of 41 per cent. The revenue in FY22 was ₹394 crore, while the company in the April-July 2022 period managed to clock ₹220.9 crore in sales. Operating profit over FY20-22 period grew by over 57 per cent to ₹46.19 crore as of FY22. For the four-month period April-July 2022, operating profit stood at ₹26.8 crore. The company has been able to achieve net profit growth of 63 per cent annually over the FY20-22 period. For FY22, the net profit was ₹28.6 crore, while the same was ₹18.3 crore for the April-July 2022 quarter. The company had debt of ₹51.5 crore (including short term) as of July 2022. The total debt to equity stood at 0.5 times as of July 2022. While the company will retire about ₹10 crore of loan and set aside ₹45 crore for working capital, it will have to raise additional debt for the Gujarat plant to the extent of ₹68 crore, besides the ₹104.9 crore of the issue proceeds it will use for the expansion. Hence, debt is expected to be marginally higher or at best remain at current levels in FY23.

While the growth in April-July period of FY23 has been quite strong, it is a short period to make any conclusions. Results for few quarters post listing will need to be assessed clearly to ascertain the long term growth prospects and profitability of the company 

Valuation

As regards valuation, the upper end of the price band of ₹237 translates into price/earnings ratio of 20.4 times of FY22 earnings. Given that the market cap of the company at the upper end of the band will likely be about ₹800 crore (micro cap), the current valuation seems aggressive. Listed midcap peers (with a higher market cap) in this space are available at a comparable valuation, thus rendering the IPO less attractive. For instance, Bharat Rasayan, with a superior operating margin of over 17 per cent, compared to 11-12 per cent for Dharmaj, trades at about 23 times FY22 earnings. Bharat Rasayan’s revenue and net profit have grown at an annualised 16 per cent and 22 per cent over the last 5 years

What should investors do

Even as the company’s growth prospects remain healthy and the management experience and bandwidth are positive, the issue has been priced aggressively leaving very less on the table for long term investors. Being a micro cap, the stock can also be volatile. Investors may hence wait for the stock to list and can consider buying it at lower levels in the secondary market, whenever the opportunity presents.  

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