India Pesticides IPO: Information analysis

Chemical companies are the flavour of the season and India Pesticides is the latest one to come out with its IPO. It is an agro-chemical manufacturer of niche technicals (approximately 80 per cent of FY21 revenue) and formulations (approximately 20 per cent). Technicals, also commonly known as active ingredients, are raw materials that are used in making the final agro chemical, while the process of forming this final product is known as formulations. The company primarily exports (56.7 per cent) technicals to various markets such as Australia, North America and others and has a diverse customer base in MNCs such as Syngenta, UPL and others. However, formulations are mainly sold domestically. India Pesticides currently runs a capacity of around 26,000 MT across two facilities and is further enhancing it to 30,000 MT. By 2024, the Indian crop protection market is expected to grow to $5.7bn from the current $4.2bn, while the exports are expected to form around 55 per cent of this market. Further, various factors such as need for increase in crop yield, providing farmers with better remuneration and others are giving impetus to this sector. Importantly, supply chain disruption caused by Covid has influenced many MNCs to follow a 'China plus' strategy, wherein, India is being looked upon attractively for supply of technicals and formulations due to low workforce costs and technical expertise. Government is also encouraging domestic manufacturing of active ingredients to cut reliance on imports from China. Riding these tailwinds, India Pesticides is coming out with a Rs 800 crore IPO, under which, Rs 100 crore is for fresh issue (to meet working capital needs) while the rest is offer for sale. Strengths The company deals in niche molecules and is the sole Indian manufacturer of five technicals. It's a leading global manufacturer of a few other herbicides and fungicides. Active ingredient producers work closely with their customers and have a long-term relationship with them. Customer onboarding is a time consuming process leading to higher switching costs. The company has focussed on R&D and as a result, since 2018, it has managed to commercialise three technicals, which form 42 per cent of FY21 revenue. Risks/Weaknesses The company doesn't have any differentiating factor such as patents, technical collaborations with global innovators, etc., that can provide a competitive advantage. It had a revenue of Rs 655 crore in FY21. Small scale of operations in a highly competitive and commoditised agro-chemical sector leaves it vulnerable to price fluctuations. Working capital cycle of more than three months puts stress on the balance sheet as the company needs to rely on short-ter