Investors with moderate risk appetite and a two-to-three-year investment horizon can subscribe to the IPO of fertiliser maker Paradeep Phosphates (Paradeep). The issue opened on May 17, 2022 and will close on May 19, 2022. The issue is priced between ₹39 and ₹42 a piece, valuing the company at five times its estimated 2022-23 earnings, at the upper end of the band. The IPO is a combination of offer for sale and fresh issue.

The company will raise ₹1,004 crore of which ₹520 crore will be used to part fund its acquisition of Zuari Agro Chemicals Ltd’s (ZACL) Goa plant. ₹150 crore will be used to retire debt. Government of India, which currently holds 19.55 per cent will exit the company completely, while the promoter Zuari Maroc Phosphates Pvt Ltd (ZMPPL) will offload about six lakh shares, which is about 0.1 per cent. 

Paradeep, which is the second largest private sector complex fertiliser (NPK) maker, is owned by Zuari Maroc Phosphates Pvt Ltd, an equal joint venture between ZACL and Morocco-based Office Cherifien Des Phosphates Group S.A. (OCP). The company’s current facility at Paradeep (Odisha) has a combined NPK, Di-ammonium phosphate (DAP) capacity of 1.2 million (mn) tonnes per annum. The stock may be a good diversification idea for those with a moderate risk appetite for three reasons.   

Expansion plans

Firstly, the company is more than doubling its complex fertiliser (NPK) capacity from the current 1.2 mn tonnes per annum to about 3 mn tonnes per annum through acquisition of ZACL’s NPK fertiliser plant in Goa, on a slump sale basis, as well as through de-bottlenecking of Paradeep facility. The Goa plant transaction, which is in the final leg, is expected to be completed in the current quarter and will add 1.2 mn tonnes per annum to Paradeep’s fertiliser capacity. The acquisition, estimated to involve a cash outflow of ₹578 crore (as of March 2022), will offer several synergies to Paradeep. Post the acquisition, the company will have access to unique, high-margin products such as Sampurna 19:19:19 and Samarth 10:26:26, besides ammonia (0.23mn tonnes) and Urea (0.4 mn tonnes). The EBITDA (earnings before interest tax and depreciation amortisation) for a tonne of NPK fertiliser grade ranges between ₹3,700 to ₹5,300 a tonne. This should be able to compensate for the lower-margin DAP ( ₹900 a tonne), which is part of the current portfolio. The acquisition also offers Paradeep, the much-valued Jai Kissan brand, which is currently being used by about 3 million farmers across key markets such as Maharashtra, Madhya Pradesh, Chhattisgarh and Karnataka among others, some of which are relatively newer markets. The company should also enjoy scale benefits while sourcing raw materials given the increase in production, post-acquisition.

The company is also increasing its granulation capacity from 1.2 mn tonnes to 1.8 mn tonnes and phosphoric acid plant capacity by 0.2 mn tonnes to 0.5 mn tonnes through retrofit process. With this, the Paradeep facility, which is the country’s third largest phosphoric acid manufacturer among fertiliser companies, will meet over 90 per cent of its acid requirement through own manufacturing. It has long agreement (valid till 2023 and extendable by another two years) with OCP - one of its promoters - for phosphate rock and phosphoric acid which should ease raw material concerns. Backward integration for phosphoric acid and long-term contracts with suppliers for key raw materials such as phosphoric acid (for Goa plant and shortfall at Paradeep), rock phosphate, ammonia and potash will help uninterrupted production and scale up.

Secondly, expectation of good monsoon coupled with the ongoing global geopolitical situation has put the spotlight on agri commodities. With the world staring at an acute shortage of crops such as wheat, the prices of agri commodities have seen a sharp rise. Likewise, global fertiliser prices have been on a roll, thanks to shortage of fertilisers and increase in input costs. The demand is expected to remain strong during the ensuing Kharif season, given the expectation of a normal south-west monsoon this year. Fertiliser realisation is also expected to edge higher, on account of increase in raw material costs. Under the current nutrient-based subsidy regime for NPK fertilisers, the government fixes subsidy for nutrients at the beginning of the year and manufacturers recover the balance from the farmers as maximum retail price (MRP). Increase in fertiliser costs should not hurt demand, given the Government’s subsidy programme wherein, in the past, the subsidy was stepped up in the event of significant increase in raw material costs, to insulate both farmers and manufacturers. Hence strong demand for fertilisers and ability to pass on raw material costs should help revenue growth without denting margins.

Fairly priced

Finally, the issue has been priced reasonably at five times its estimated 2022-23 earnings. This is a significant discount to its close peer Coromandel International Ltd, which currently trades about 14 times its 2022-23 estimated earnings. Given the new capacity addition at Paradeep and the acquisition of Goa NPK facility, earnings is expected to remain healthy at about 30 per cent in 2022-23. The balance sheet also looks comfortable with a debt-to-equity ratio of about 0.1. The company’s revenue and operating profit grew at a CAGR of 9 per cent and 11 per cent respectively, in the last two years.

Risks

Fertiliser being an essential commodity, there is regulatory oversight by the Government. Complex fertiliser makers are dependent on the Government for recovering subsidy, which accounts for about a third of their revenues. Any delays in payment of subsidy can add to working capital stress. However, in the last two years, after the implementation of direct benefit transfer, the lead time for payment of subsidies has reduced considerably from over a month to almost two weeks now.

The writer is an independent consultant

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