Heranba Industries IPO: Addressal of non-operational issues and sustained performance will be key driver for investors entry


If you are considering investing in Gujarat-based agrochemicals firm Heranba Industries, you will have to factor in two important things — can the company sustain its performance over the coming quarters and will it effectively address challenges related to corporate governance.


The issue


The company plans to raise Rs 625 crore from its initial public offering, of which Rs 565 crore is offer for sale by founders while the balance is fresh issue of equity.

The issue may draw investor interest because it is the market leader in pyrethroids —an insecticide category, and due to its better risk-return compared to peers.


Business model


Heranba is a crop protection chemicals manufacturer present in the entire value chain of agrichemicals, including intermediates, technicals and formulations.

The company dominates the pyrethroids market with a 19.5% share. The insecticides produced from pyrethroids are mainly used in cultivation of fruits and vegetables, cotton, rice, soybean, cereals, and maize. The company has three manufacturing plants around the Vapi industrial belt with an aggregate manufacturing capacity of 14,024 MTPA. According to IMARC estimates, the pyrethroid market is expected to grow 8.5% annually between 2020 and 2025 and touch production volumes of 25,398 tonnes.


Financials


The company’s revenue grew at a Compounded Annual Growth Rate (CAGR) of 13.5% between FY18 and FY20, while profits rose at a CAGR of 44% in the same period. Operating profit margins were at 12.5-15.3% in the previous three fiscal years. In the first half of FY21, the company’s revenue grew 23% to Rs 619 crore, while profit touched Rs 66.3 crore. Its return on equity at the end of FY20 stood at 30.46%, one of the highest among peers. Domestic revenue accounts for nearly two-thirds of its total revenue, while the remaining is from exports, mainly to China, which increased to 14.71% in the first half of FY21 compared to 13.24% in FY20.


Risks


Apart from broader risks associated with the agro-chemicals industry, ranging from high working capital to frequent intervention by environment regulators, the company faces business risk due to non-operational reasons. A group company – Shakti Bio Science – owned by promoters was declared a wilful defaulter in 2017. In addition, Heranba is a co-borrower of a term loan of Rs 35 crore provided to a group entity and will have to bear liability in case of default. Furthermore, the promoters have been disqualified from acting as directors of the group company due to non-compliance in filing annual returns. Markets regulator Securities and Exchange Board of India (Sebi) has also issued few administrative orders against the promoters.


Valuation


At the upper end of the IPO price band, the issue commands price-to-earnings multiple of 19 times after annualising its profits for FY21. This is at a significant discount to the industry average of 60. This steep discount is a consequence of certain non-operational challenges it faces when compared to peers.


Issue details


Price band: Rs 626-627

Issue size: Rs 626 crore

Implied market cap: Rs 2,500 crore

Issue opens on Feb 23, closes on Feb 25



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