Is there an investment opportunity in PSP Projects shares?

Initial public offering by agrochemical company India Pesticides opened for subscription on June 23. The company plans to raise Rs 800-crore from the primary market. India Pesticides has fixed a price band of Rs 290-296 apiece for the IPO. The three-day initial public offer will conclude on June 25. The public offer comprises fresh issuance of equity shares amounting to Rs 100 crore and an offer of sale for equity shares aggregating up to Rs 281.4 crore by promoter Anand Swarup Agarwal and up to Rs 418.6 crore by other selling shareholders.

Half of the issue is reserved for qualified institutional buyers, 35% for retail investors and 15% for non-institutional bidders. A retail investor can bid for a minimum of 50 equity shares and in multiples, thereafter, translating to a minimum bidding amount of Rs 14,800 at the higher end of the price band. A retail investor can at max apply for 13 lots or 650 shares for 1,92,400.

Ahead of the IPO India Pesticides raised Rs 240 crore from anchor investors allotting them 81,08,107 equity shares to 12 anchor investors at Rs 296 apiece. Among the foreign portfolio investors who participated in the anchor book were Abu Dhabi Investment Authority, Tara Emerging Asia Liquid Fund and BNP Paribas.

The domestic investors were SBI Mutual Fund, Nippon India Mutual Fund, Tata Mutual Fund, Bajaj Allianz Life Insurance Company, Bharti AXA Life Insurance Company and Winro Commercial India Ltd.

Grey market chatter

In the grey market, shares of India Pesticides are quoting at Rs 341-344 (today at 10:40 am) implying a premium of 15-16%. Commenting on the movement in the grey market, Abhay Doshi, founder, Unlisted Arena, dealing in pre-IPO and Unlisted shares told Money9.com that the grey market is quite speculative generally, so volatility is normal. “If we see some past chemical stocks listings they have not performed on debut day according to grey market expectations. However, after the debut most of the stocks have performed well and India Pesticides limited too looks fundamentally strong on the financial front,” he said.

Should you subscribe

Most brokerages believe that the issue is fairly valued and have assigned subscribe rating to it. Here’s what they have to say.

Motilal Oswal | Rating: Subscribe

Given India Pesticides presence in the fast-growing agrochemical space, diversified product portfolio and robust financials. Strong R&D, long term relations with MNCs, cost competitiveness and extensive distribution network are some of the other key positives. Expanding product portfolio, growing customer base and increasing wallet share of existing customers can help the company to maintain its growth momentum. The issue is reasonably valued at 25.3x FY21 P/E (price to earnings ratio) on a post-issue basis, vis-à-vis peers (avg. peer P/E of 36.4x), while it enjoys higher RoE (Return on Equity) of 36% (avg. peer RoE of 21%).

ICICI Direct | Rating: Subscribe

At Rs 296, the stock is available at P/E of 25.3x FY21. Since the company caters to a few large formulators globally, the upcoming capacity expansion is likely to improve the economies of scale. Further, technicals being a higher-margin segment compared to formulations, increase in revenue share bodes well for return ratios and thereby valuations.

Prabhudas Lilladher | Rating: Subscribe

India Pesticides Limited (IPL), a niche play in the manufacturing of pesticides technical (79% of rev) and formulation (21%). Our positive stance emanates from it is the sole manufacturer of 5 technical in India and leading manufacturer of certain molecules like Captan, Folpet and Thiocarbamate herbicide and none of its technical molecules is classified under “Red triangle”.

At upper-end price band of Rs 290-296, the issue comes at an indicative rough estimate P/E multiple of 17.1x FY23E EPS (earnings per share) of Rs 17.3. On TTM (Trailing Twelve Month) basis, the issue is priced at 24.7x FY21 earnings which is at median valuation compared to its listed peers i.e. Rallis (@30x FY21 earnings), Heranba Inds (@ 18.5x FY21 earnings) and Astec Lifescience (@ 40.9x FY21 earnings).

Sharekhan | Rating: Subscribe

India Pesticides Ltd total revenue from operations increased by 90.48% from Rs. 340.69 crore in FY19 to Rs. 648.95 crore in FY21 (CAGR – 38%; OPM expansion of 900 basis points). Reported PAT grew by 89% y-o-y to Rs. 134 crore in FY2021. The company has a strong earnings track record with 75% PAT CAGR (compounded annual growth rate) over FY19-FY21 and RoE (Return on Equity) of more than 34%. The company is the sole Indian manufacturer of five technicals and among the leading manufacturers globally for Captan, Folpet and Thiocarbamate Herbicide, in terms of production capacity. Its focus on new product registrations and exports is expected to drive sustained earnings growth.

Antique Stock Broking | Rating: Subscribe

India Pesticides has the potential to post 25-30% EPS (earnings per share) CAGR (compounded annual growth rate) over FY21-23e led by enhanced capacity additions and better working capital from the IPO proceeds and optimum utilization at plants. At the issue price of INR296/share (implied M-cap of Rs 3,400 crore; 3% dilution) the stock is available at 16xFY23e EPS (earnings per share), which is at discount to its peers like Sharda Cropchem, UPL, Dhanuka Agritech and Rallis India (trading in the range of 12-22x FY23 EPS). It is worth highlighting that the company has issued shares to the promoter (3.7 lakh shares at Rs 33.7/share) by way of private placement in January’21 (dilution of 0.3% of FY21 equity).

(Disclaimer: The recommendations in this story are by the respective research and brokerage firm. Money9 & its management do not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)