Paradeep Phospates IPO: Information analysis

Incorporated in 1981, Paradeep Phospates is involved in the manufacturing, trading, distribution and sales of various complex fertilisers. It is India's second largest non-urea fertiliser manufacturer and second largest private manufacturer of diammonium phosphate (DAP) in terms of volume. It manufactures DAP, Nitrogen-Phosphorus-Potassium (NPK) in three grades - zypmite, phospho-gypsum, and hydroflorosilic acid.

The company was initially owned completely by the government of India until it diluted 74 per cent of its stake to Zuari Maroc Phosphates Private Limited (ZMMPL). Later in 2003, through a rights issue, ZMMPL increased its stake to 80.45 per cent which is maintained till date and the rest 19.55 per cent is owned government owned. Through this issue, the government of India will completely dilute its stake and cease to be a promoter. ZMMPL is a joint venture where Zuari Agro Chemicals Ltd (ZACL) and OCP group S.A have an equal stake.

Paradeep Phosphates has one manufacturing unit in, you guessed it right, Paradeep, Odisha. It includes a DAP and NPK production facility (1.5 million MT), sulphuric acid production plant (1.3 million MT), and a phosphoric acid production plant (0.3 million MT). Apart from that, the company also has sufficient raw material storing facilities. In July 2021, Paradeep Phosphates has agreed to buy ZACL's Goa facility for Rs 2,052 crore (approx.) to increase production capacity and to gain access to Maharashtra and Karnataka market.

India's fertiliser requirements is expected to reach 66 million tonnes by 2026 growing at 3.1 per cent CAGR, as per CRISIL report. For FY23, the government has increased the nutrient based subsidy to Rs 30,939 crore. Combining this with decontrolling of retail prices for phosphatic fertilisers and a growing market, Paradeep Phosphates is expected to benefit from it.

Strengths:

• Strategic location of the unit: The company's manufacturing unit is located close to the Paradeep port and the plant is connected to the port directly with a 3.4 km long conveyor belt. This makes it easy and efficient for the company to transport raw materials. Combining this with its adequate raw material storage capacity, the production process is not likely to be interrupted.
• Integration of manufacturing facilities: Paradeep Phosphates needs sulphuric acid and phosphoric acid for the production of DAP and NPK. In order to reduce its dependence on external suppliers, the company has its own manufacturing plants for both sulphuric and phosphoric acid and also sufficient storage capacity for future use. The company also has two power plants with 16MW capacity which uses the excess steam from sulphuric acid and phosphoric acid plants.
• Established brand and network: Paradeep Phosphates is the second largest phosphatic fertiliser manufacturer in India. Some of the key brands of the company are - 'Jai Kisaan - Navratna' and 'Navratna' which are well recognised, especially in the eastern part of the country. The company's network includes 4,761 dealers and 67,150 retailers through which it caters to over 5 million farmers.

Weaknesses:

• Revenue concentration: Significant portion of the company's revenue comes from government subsidies for fertilisers. In FY21 and nine months ended December FY22, 40.1 and 34.4 per cent of revenue, respectively, accounted for subsidy received from the government of India. Also Maharashtra, Uttar Pradesh and Odisha accounted for 53 and 50 per cent of revenue in FY21 and nine months ended December FY22 respectively. Any change in regulations or seasonal changes in this region may affect Paradeep Phosphates drastically.
• Subsidy due from government: As of 31 December 2022, the company had Rs 1,410 crore due from the government of India for subsidies. During the same periods, the average number of days to receive such amount is 60 days. Any increase in this credit period or delay in payment by government can affect the company's liquidity position. Also in FY20 and FY19, the number of days to receive subsidy amount was 108 and 101 respectively.
• Dependence on few suppliers: Paradeep Phosphates depends upon few suppliers such as OCP, Indo Maroc Phosphore SA Morocco, Phosphates De Boucraa SA and Jorf Fertiliser SA for majority of its raw materials. The important thing to know is that OCP is an indirect promoter of Paradeep Phosphates since it owns 50 per cent stake in ZMMPL. Also import from Morocco accounts for 59 per cent of total imports and OCP contributes most of it. The company also highly depends on imports for its raw materials.

Also read about Paradeep Phosphates IPO: How good is it? to learn how we evaluate the company on various metrics.

Disclaimer: The author may be an applicant in this Initial Public Offering.