HP Adhesives IPO subscribed 8.03 times at end of day 2

**HP Adhesives Limited IPO opened for subscription on 15th December. The IPO got subscribed 8.03 times at end of day 2. The company is looking to raise up to Rs 125.96 crore through the public issue. Here are the details:** ## **About HP Adhesives Limited IPO** **HP Adhesives Limited IPO Date:** 15 December - 17 December 2021 **HP Adhesives Limited IPO Price band:** Rs 262 - Rs 274 **Issue Size:** Rs 125.96 crore (Fresh issue aggregating up to Rs 113.44 crore and offer for sale aggregating up to Rs 12.53 crore) **Reservation:** QIB 75%, Retail - 10, NII 15% **Minimum Investment:** Rs 13,700 **Bid lot:** 50 shares, and in multiples of 50 shares ## **Objectives of the issue** The net proceeds from the IPO will be utilized for the following purposes : - Funding the working capital requirements of the company - Funding capital expenditure for expansion of production capacity at the existing manufacturing facility in Maharashtra  - For additional units having a proposed construction area and measuring about 4,532.57 square meters. ## **About HP Adhesives** - HP Adhesives Limited is an **adhesives and sealants company**. - It manufactures a wide range of consumer adhesives and sealants such as PVC, cPVC, and uPVC solvent cement, synthetic rubber adhesive, PVA adhesives, silicone sealant, acrylic sealant, gasket shellac, other sealants, and PVC pipe lubricants.  - HP Adhesives products find **applications in multiple industries** such as plumbing and sanitary, drainage and water distribution, and interior operations as well as for glazing operations, woodwork, footwear, automotive, and other varied industries. - The company also sells ancillary products like ball valves, thread seals, and other tapes and FRP products for drainage and architectural solutions. - It has a d**istribution network of 4 depots** situated in Delhi, Kolkata, Bengaluru, and Indore and more than **750 distributors** who cater to more than 50,000 dealers in India.  ## **PVC Adhesives Industry Outlook** The size of the Indian PVC adhesives market was Rs 681 crore as of FY20, while in FY21, the market de-grew by ~9% to Rs 620 crore. It was on account of the demand slump because of Covid. The market has grown at around **10% CAGR**, in line with the rapid growth in the plastic pipes segment, which grew at a healthy **CAGR of 10-11% over FY15 to FY20**. Industry growth was driven by rising demand from the construction and irrigation sectors in the last few years. The industry received a **boost from** the government’s **Atal Mission for Rejuvenation and Urban Transformation (AMRUT) scheme.** Among several variants of plastic pipes available in the market, demand for uPVC and CPVC, in particular, has been rising, due to affordability, high quality, and durability. ## **HP Adhesives Listed Peers** The market has both core manufacturers and pipes and fittings players who have entered the PVC adhesive manufacturing space. The leading manufacturers include HP Adhesives Ltd., **Astral Adhesives, and Ashirvad Pipes**. While pipes and fitting players include **Prince Pipes, Apollo Pipes, Jain Irrigation, and Supreme Industries**. However, these players manufacture very small volumes as compared with core manufacturers. The company is truly comparable with only Pidilite Industries.  - Pidilite enjoys over 65% (overall) market share while HP Adhesives has a market share of around 17% (for solvents). Thus it will be the second-largest player in the segment among listed entities.  - To gain market share, HP Adhesives is taking a small hit on margins. Its expansion will bring more additions to the top and bottom lines once completed.  - Pidilite is a much larger player for comparison with revenue of Rs 7,293 crore (FY21) compared to Rs 118.16 crore revenue for HP Adhesives. - The Earning Per Share (EPS) for Pidilite is three times that of HP Adhesives. Pidilite EPS is 22.24 (Diluted). - Return on Net Worth (RoNW) is higher for HP Adhesives at 79% compared to 20.22% of Pidilite. ## **HP Adhesives Financials**  - The company has reported revenue of Rs 118.16 crore, Rs 95.48 crore, and Rs 87.42 crore in FY21, FY20, and FY19, respectively. - The net profit (PAT) for FY21, FY20, and FY19 is Rs 10.06 crore, Rs (4.67) crore, and Rs 4 crore, respectively. - The EBITDA for FY21, FY20, and FY21 is Rs 17.69 crore, Rs 6.92 crore, and Rs 8.71 crore, respectively. The EBITDA margin for the same period was 14.97%, 7.3%, and 9.95%, respectively. - The average Earning Per Share (EPS) for the last three financial years is 2.41, while RoNW for FY21 is Rs 79%. - The ROE and ROCE for FY21 are 79.5% and 31.6%, respectively. - The export business constitutes 17.20% and 11.51% of sales in the FY21 and six months period ended September 30, 2021, respectively, and has grown 17.30% CAGR over the last 11 years. ## **HP Adhesives USPs** **Consistently growing company with brand presence -** The company has grown from a single product to a multi-product company with sales across India and in international markets. The company has shown good growth in terms of revenue. It has a brand image that has enabled them to introduce newer product categories through the existing distribution network initially and then to a larger customer base with established goodwill. **Wide Product Portfolio and multiple SKUs** - Over the last few years, they have expanded their product portfolio to multiple product categories including silicone sealants, synthetic rubber adhesives, PVA adhesives, and other sealants. Within each product category, they have multiple SKUs in terms of grades, pack sizes for various applications, thereby enabling them to meet the needs of a diverse customer base. **Multiple end-user industries** - Presence in silicone sealants has allowed them to diversify into more end-user industries such as automobiles, electronic devices, and appliances, glass and glazing, external weather sealing, general interior sealing, bathroom, and sanitary. **Extensive distribution network** - Its distributors cater to retailers who, in turn, make the product available for end-users (typically plumbers, carpenters, masons, glazing contractors, etc). They have more than 750 distributors, and no distributor constitutes more than 5% of total sales (FY21). ## **HP Adhesives Growth Potential** **Introduce new products** - The company is focused to introduce new product categories to cater to more end-users. Identifying and developing new products and product categories is a continuous exercise that the management team engages in. **Expansion of manufacturing facility** - The company is in the process of carrying out capacity expansion plans at their existing manufacturing facility at Village Narangi, Raigad, Maharashtra to aid its growth efforts and pan-India presence.  **Plant automation** - It plans to automate the process of manufacturing and packaging. The plant & machinery at the facility under expansion is targeted to be more automated to reduce human intervention and thus decrease the scope of human error. ## **HP Adhesives Risks** **Delay in the expansion of manufacturing facility** - The expansion plans remain subject to potential problems and uncertainties including cost overruns or delays. Problems that could adversely affect expansion plans include labor shortages, increased costs of equipment or manpower, etc. The proposed expansion by setting up an additional unit will require us to obtain various approvals. There can be no assurance that the company will be able to obtain these registrations and approvals in a timely manner or at all. **Relationship with distributors** - HP Adhesives business is dependent on the decisions and actions of distributors which is determined by the company's ability to maintain and strengthen relationships with existing distributors and maintain relationships with new distributors. Its inability to enter into new relationships and expand its distribution network will have an impact on its operations. **No long-term agreements with suppliers** - The company does not have long-term agreements with suppliers for raw materials and an inability to procure the desired quality, quantity of raw materials in a timely manner and at reasonable costs will impact its business. **Borrowing from banks** - The company has borrowings from commercial banks. They have Total Borrowings of Rs 42.20 crore as of March 31, 2021, which comprises secured loans from ICICI Bank and IndusInd Bank. Its inability to comply with repayment and other covenants in financing agreements could adversely affect the business. ## **HP Adhesives: ** HP Adhesives has reported a steady 16% CAGR rise in its total revenues to Rs 118 crore between FY19 and FY21. The company was able to reverse the trend, and post a profit of Rs 10 crore, as compared to a loss of Rs 4.67 crore in the previous year. The company’s margins and return ratios have also shown good improvement over the year. At the higher end of the price band, HP Adhesives IPO is priced at a PE ratio of ~50 times FY21 EPS (on a fully diluted basis). This is lower than listed peer Pidilite Industries (90 times). However, given better brand recall and leadership status, Pidilite is expected to command a higher valuation.  Given the company’s strong product profile, healthy rise in topline, strong market share, improving financial profile, and strong runway for growth, we remain “Positive” on the long-term prospects of the issue. ## Subscription status as at 16th December 2021 (End of Day 2) | Category | Subscription (times) | |-----------|----------------------| | QIB | 0.34 | | NII | 1.90 | | Retail |40.29 | | Total | 8.03 |