Pradeep Phosphates IPO

Published by Sharekhan Education | May 17, 2022

Pradeep Phosphates IPO

Amit Pathak | Sharekhan Education

About the Issue:

Issue size: ₹ 1502 Cr
Price Band: ₹39 – ₹42
The issue opens on: Tuesday, 17th May’2022
The issue closes on: Thursday, 19th May’2022

Company Overview:

Paradeep Phosphates is the second-largest private-sector manufacturer of non-urea fertilizers in India. It is primarily engaged in manufacturing, trading, distribution, and sales of a variety of complex fertilizers such as DAP, three grades of Nitrogen-Phosphorus-Potassium (NPK), Zypmite, Phospho-gypsum, and Hydroflorosilicic Acid. Some of the key brands of the company are Jai Kisaan – Navratna and Navratna. It has established an extensive sales and distribution network, with a strong presence in the eastern part of India. Its network includes 4,761 dealers and over 67,150 retailers, catering to over five million farmers in India.

Objectives of Issue:

The IPO is a combination of an offer for sale (OFS) and a fresh issue. As a part of OFS, the government is selling its 19.5% stake in the company. The company will use the proceeds from the fresh issue to partially finance the acquisition of its Goa facility and repay debt. Investors will have to make a minimum application  for 350 shares and in multiples thereon. Post allotment, the company will list the shares on BSE and NSE. Listing of the equity shares will result in the enhancement of the brand name.

Industry Overview:

India lags behind other countries in terms of yield for key crop categories like cereals, pulses, and fruits. Increased usage of fertilizers, crop protection, seeds, and the adoption of modern farming techniques are key to improving this yield. India is one of the major importers of fertilizers. The government subsidizes many essential fertilizers in India. The fertilizer industry is highly dependent on monsoons for growth in demand. Typically, the demand for fertilizers picks up during seasons of good rainfall, which helps the companies improve their financial performance through volume growth. On the other hand, drought conditions lead to high inventory levels and a consequent decline in profits. Over the long term, demand for non-urea fertilizers is expected to have a CAGR of 4-5% between FY22-26.

The Company’s manufacturing facility is strategically located near the Paradeep port, where it owns a captive berth with 14 meters draft with facilities to unload solid and liquid cargo. It owns large parcels of land aggregating to approximately 2,282.4 acres in Paradeep. Its existing manufacturing facility is constructed on approximately 33% of such land parcels. Being in a port city facilitates PPL’s access to a network of railways, waterways, and highways. It also has an Ammonia storage facility of approximately 40,000 MT. The ability to store raw materials at its facility enables it to withstand disruptions in supply as well as volatility in the price of raw materials for a short duration.

The company has backward integrated its manufacturing process by producing two key raw materials by value, phosphoric acid, and sulphuric acid. It is well-positioned to capitalize on favorable trends in the Indian fertilizer industry, given the government’s focus on the agriculture segment.

Key Concerns:

Government regulates the fertilizer industry in India. Any change in government . policies towards the agriculture sector like reduction in subsidies and incentives provided to farmers could adversely affect the business. There is a risk of geographical concentration. It has historically derived a significant portion of its revenues from a limited number of states and any adverse developments in these states could adversely affect the business. Shortage of electricity, water, fuel & RLNG, or an increase in fuel prices may adversely affect PPL’s production operations. Competition is also emerging from organic farming, biofertilizers, and water-soluble fertilizers.

Financials: 

For FY21, consolidated sales were up by 23%, operating profit increased by 18% whereas net profit increased 16%. Operating Margins and ROE stood at 10.5% and 12.2% respectively. At the higher price band of Rs 42, the offer is made at a P/E of around 15. Listed peer like Coromandel International trades at a P/E of 16.9. Overall there is relative valuations comfort. We are having a positive view of the company.

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