Paradeep Phosphates Limited IPO opens tomorrow: Should You Apply?

Paradeep phosphates Limited
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Paradeep Phosphates Limited IPO opens for subscription on the 17th May. The company is looking to raise up to Rs 1,501.73 crore through the public issue. 

Paradeep Phosphates Limited IPO Details:

Paradeep Phosphates IPO Date: 17 May - 19 May 2022

Paradeep Phosphates IPO Price band: Rs 39 - Rs 42

Paradeep Phosphates IPO Issue Size: Rs 1501.73 crore (Fresh Issue of Equity shares aggregating up to Rs 1004 crore and an Offer for sale of 118,507,493 Equity shares)

Reservation: QIB 50%, Retail 35%, NII 15%

Post Issue Implied Market Cap: Rs 3420.89 crore (on upper price band)

Minimum Investment: Rs 14,700

Bid lot: 350 shares, and in multiples of 350 shares

Paradeep Phosphates IPO: Objects of the Issue

The net proceeds from the IPO will be utilized for the following purposes:

  • Part-financing the acquisition of the Goa Facility.
  • Repayment/prepayment of certain borrowings and general corporate purposes.

Paradeep Phosphates: About the company

  • Paradeep Phosphates was incorporated in 1981, and it is a manufacturer of non-urea fertilizers in India.
  • They are engaged in manufacturing, trading, distribution, and sales of many complex fertilizers such as DAP, three grades of Nitrogen-Phosphorus-Potassium, Zypmite, Phospho-gypsum, and Hydroflorosilicic Acid.
  • They are the second-largest private-sector manufacturer of non-urea fertilizers in India and the second-largest private-sector manufacturer in terms of Di-Ammonium Phosphate (CRISIL report).
  • Their manufacturing facility is located in Paradeep, Odisha, and includes a DAP and NPK production facility, a Sulphuric acid production plant, and a Phosphoric acid production plant.
  • The company has an extensive sales and distribution network, with a strong presence in the eastern part of India. Paradeep Phosphates distributed products across 14 states in India through the network of 11 regional marketing offices and 468 stock points (31 March 2022).
  • The fertilizers are marketed under some of the key brand names in the market ‘Jai Kisaan – Navratna’ and ‘Navratna’. 

Industry Outlook

  • India consumes a higher quantity of fertilizer per hectare of Arable Land and Land under Permanent Crops compared to a global average.
  • Urea will continue to have a dominant share in fertilizers owing to a higher preference among marginalized farmers and middle-income farmers. However, growth is expected to be much slower than the fifteen-year growth of approximately 2.5% CAGR due to increasing awareness among farmers regarding soil fertility.
  • Over the long term, demand for non-urea fertilizers is expected to have a CAGR of 4-5% between FY22 and FY26.

Paradeep Phosphates's Products

They are engaged in the manufacturing, distribution, trading, and sales of many complex fertilizers. Some of them are:

  • DAP: DAP is a granulated, high-quality, water-soluble, complex mineral fertilizer containing primarily 18% Ammoniacal Nitrogen by weight and 46% Phosphate by weight.
  • NPK: Multi-nutrient, complex fertilizers, commonly referred to as NPK include all three main nutrient elements: Nitrogen, Phosphate, and Potassium.
  • Zypmite: Zypmite is a micronutrient mixture containing Sulphur, Zinc, Boron, Calcium, and Magnesium and improves soil fertility.
  • Phospho-gypsum: It contains Sulphur and Calcium in the ratio of 17:21 and increases crop yield, crop product quality, and oil content in oilseeds.

Listed Peers

  • The listed peers of the company include companies like Coromandel International Limited, Chambal Fertilizers Chemicals Limited, and Deepak Fertilizers and Petrochemicals Limited.
  • In terms of revenue, Coromandel International is the biggest player with Rs 14,257 crore revenue, while Paradeep Phosphates is last on the list.
  • Among the listed peers, Paradeep Phosphates has the lowest PE of 7.07, while the average P/E of listed peers is 15.73.
  • Earning Per Share (EPS) is lowest for Paradeep Phosphates compared to peers. Coromandel is on top of the list with an EPS of 45.34.
  • Return on Net Worth (RoNW) is also lowest for Paradeep Phosphates at 12.22%, while Chambao Fertilizers have the highest RoNW of 33.3%.

Financials

  • The company has reported revenue of Rs 4397.21 crore, Rs 4227.78 crore, and Rs 5183.94 crore for FY19, FY20, and FY21, respectively. The revenue in FY21 has increased by over 22% compared to previous years.
  • For the same period, the company has reported a profit of Rs 158.96 crore, Rs 193.22 crore, and Rs 223.27 crore, respectively.
  • EBITDA for FY19, FY20, and FY21 was Rs 561.26 crore, Rs 493.83 crore, and Rs 480.78 crore, respectively.
  • Company margins have improved significantly from Rs 158.9 crores (3.6%) of revenues in FY19 to Rs 223.2 crores (4.3%) of revenues in FY20. Its margins rose to 6% of revenue for the nine months ending December 21.
  • For the last three financial years, PPL has posted an average EPS of Rs 3.52 and an average RoNW of 11.91%.

USPs

Well-positioned to capture favorable Indian fertilizer industry:  The company is well-positioned to capture a significant share of the growth due to its sizable and certified manufacturing facility and infrastructure, backward integration of manufacturing process, and established sales and distribution network.

Second largest manufacturer of Phosphatic fertilizers: Among private sector entities with a focus on the non-urea segment, they are the second largest in terms of phosphatic fertilizer (DAP and NPK complexes) capacity. For FY22, they are the second-largest backward integrated manufacturer in the private sector with Phosphoric acid capacity in India. 

Raw material efficiency: Company's primary raw materials include Phosphate Rock, Phosphoric acid, Ammonia, Sulphur, and MOP. To ensure a stable supply of its most important raw material by value, Phosphate Rock, they have entered into a long-term supply agreement with OCP for the procurement of Phosphate Rock for three years, expiring December 31, 2023, which will be renewed.

Strategic location of manufacturing facility: Their manufacturing facility is strategically located near the Paradeep port, where they own a captive berth with 14 meters draft with facilities to unload solid and liquid cargo. As a result, they can meet the loading and unloading schedules of the carriers and save on demurrage charges.

Grow potential

Have diversified product portfolio: With the completion of the Goa Transaction, the company will gain access to an additional product mix, resulting in a more diversified product portfolio. The acquisition of the Goa Facility gives them the ability to manufacture and sell Urea as well as certain grades of NPK.

Improve cost efficiency and productivity: The company has taken many measures to enable operational efficiency. They had taken steps to increase their annual production of Sulphuric acid through the installation of a new acid plant. Currently, they are in the process of increasing the annual granulation capacity of the DAP and NPK plants.

Increase geographical reach: The company plans to develop its distribution network and increase geographical reach through reinforcing and expanding distribution channels. They have initiated programs such as Jai Kisaan Sambandh, a retailer loyalty program to reward the top retailers selling 50 tons and more of DAP and complex fertilizers. 

Inorganic growth opportunities: They intend to grow the business and increase the range of products and services by exploring acquisition targets. They intend to selectively pursue opportunities that will strengthen their market position and enable them to expand their product portfolio and increase sales, marketing, and distribution network.

Risks

Business dependent on the performance of agricultural sectors: The business is dependent on the performance of the agricultural sector in which fertilizers are used. The performance of the agricultural sector and consequently the demand for fertilizers is dependent on the area under cultivation, soil quality, climatic conditions, adequacy of water supply, etc. Any developments affecting the performance of the agricultural sector are likely to affect their business.

Business is cyclic: Business is sensitive to weather conditions such as drought, floods, cyclones, and natural disasters, as well as events such as pest infestations. In addition, sales of fertilizers in India are typically seasonal due to the monsoon. Seasonal variations and unfavorable local and global weather patterns may hurt their business.

Regulated industry: The fertilizer industry in India is a regulated industry. Any change in Government policies towards the agriculture sector or a reduction in subsidies and incentives provided to farmers could adversely affect the business.

Paradeep Phosphates IPO: INDmoney Review

  • Steady rise in revenues: Revenue increased at 8.5% per year between FY19 and FY21, driven by strong demand for fertilizers. 
  • Strong Profit growth: The company has seen a strong 18% CAGR rise in profit over FY19-21 to Rs 223 crore, driven by raw material efficiency and effective sourcing. The Profit has risen to Rs 362 crore in Apr-Dec 21 period. 
  • Improving margins: The EBITDA margins have been in a healthy range of 10-12%, aided by backward integration and higher production of phosphoric acid.   
  • Reasonable valuations: At the higher end of the price band, Paradeep Phosphates IPO is priced at a PE ratio of ~7 times FY22 annualized EPS. This is cheaper compared to Coromandel International ( 18.35 times), Chambal Fertilizers (12.93 times)  and Deepak Fertilizers (35 times).  
  • Final recommendation: Given factors such as steady growth in topline due to higher demand, healthy profit growth, improving margins, strong market share in fertilizer market (DAP), good tailwinds for the agri-industry and reasonable valuations, we remain “Positive” on the long-term prospects of this issue.
  • Paradeep Phosphates IPO date: When does it open for subscription?
  • Paradeep Phosphates IPO issue size: How big is this IPO?
  • How to apply for Paradeep Phosphates IPO?
  • What is the lot size for Paradeep Phosphates IPO?
  • When will Paradeep Phosphates IPO allotment happen?
  • When is Paradeep Phosphates IPO going to get listed?
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