Paradeep Phosphates IPO: How good is it?

In our previous part of Paradeep Phosphates IPO story, we read about the key details of the IPO along with important information about the complex fertilisers manufacturer. Here we will answer some questions about Paradeep Phosphates and evaluate it on parameters like management, financials, valuations, etc.

IPO questions

The company/business

1) Are the company's earnings before tax more than Rs 50 crore in the last 12 months?
Yes. The company's profit before tax for FY21 was Rs 367 crore.

2) Will Paradeep Phospates be able to scale up its business?
Yes. With the purchase of its Goa facility from ZACL, the company's production capacity will increase by 0.8 MT and it will also get access to new markets.

3) Does Paradeep Phosphates have recognisable brands truly valued by its customers?
Yes. The company's brands 'Jai Kisaan - Navratna' and 'Navratna' are well recognised among the farmers.

4) Does Paradeep Phospates have high repeat customer usage?
Yes. Farmers purchase fertiliser each year and even multiple times depending upon need. Since the company is a leader in non-urea fertilisers, it is safe to say that it has a high repeat customer usage.

5) Does the company have a credible moat?
No. Although Paradeep Phosphates is a leader in non-urea fertiliser segment, it does not have a solid moat.

6) Is the company sufficiently robust to major regulatory or geopolitical risks?
No. The company highly depends upon import of raw materials. In FY21, imported raw materials accounted for 97.7 per cent of the total raw materials consumed. Thus any geopolitical tension can affect the company.

7) Is the business of the company immune to easy replication by new players?
Yes. Apart from establishing a reliable network, the fertiliser industry is a bit capital intensive and highly regulated one which is difficult for a new player to adapt.

8) Is the company's product able to withstand being easily substituted or outdated?
No. Although all farmers need fertilisers, there are many other options available in the market for them.

9) Are the customers of Paradeep Phosphates devoid of significant bargaining power?
Yes. Since the customers are individual farmers, they do not have significant bargaining power. Also as per NBS policy, producers are free to fix retail prices for phosphoric fertilisers.

10) Are the suppliers of Paradeep Phospates devoid of significant bargaining power?
No. The company highly depends upon few suppliers and one of them is OCP, an indirect promoter. They may command significant bargaining power.

11) Is the level of competition the company faces relatively low?
No. There are many other fertliser manufacturers in India.

Management

12) Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
Yes, the company's promoter company Zuari Maroc Phosphates Private Limited (ZMMPL) will continue to hold 56.1 per cent stake post-issue.

13) Do the top three managers have more than 15 years of combined leadership at the company?
Yes. The company's chairman Saroj Kumar Poddar and Managing director Narayanan Suresh Krishnan have a combined experience of more than 15 years.

14) Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
Yes. We have no reason to believe otherwise.

15) Is the company free of litigation in court or with the regulator that casts doubts on the management's intention?
No. There are a total of 174 cases involving the company with 71 criminal proceedings. Total amount involved of all cases is Rs 561 crore. One such case is by government of Maharashtra against the company for not manufacturing and selling fertilisers adhering to standards.

16) Is the company's accounting policy stable?
Yes. We have no reason to believe otherwise.

17) Is the company free of promoter pledging of its shares?
Yes. The company's shares are free of any pledge.

Financials

18) Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
No. The company's three year average ROE and ROCE is 11.7 and 11.4 per cent respectively. In FY21, the company's ROE and ROCE were 12.2 and 13.7 per cent respectively.

19) Was the company's operating cash flow positive during the last three years?
No. The company reported negative operating cash flow in FY19 due to increase in inventories and trade receivables.

20) Did Paradeep Phospates increase its revenue by 10 per cent CAGR in the last three years?
No. The company's revenue increased by 9 per cent from FY19 to FY21. Although we must mention that for 2.75-year period from FY19 to nine months ended FY22, the revenues have grown at 12 per cent.

21) Is the company's net debt-to-equity ratio less than one, or is its interest-coverage ratio more than two?
Yes. the company's net debt to equity ratio, as of December 2021, is one time and interest coverage ratio for FY21 is 4.3 times.

22) Is the company free from reliance on huge working capital for day-to-day affairs?
No. Although the company is working capital positive, its average working capital cycle days during last three years is 167 days. Combining this with dependence on subsidy from the government, there may be some working capital concerns in future.

23) Can the company run its business without relying on external funding in the next three years?
Yes. The company is already profitable and generates positive operating cash flow. After acquiring Goa facility, the company's capacity would increase too.

24) Have the company's short-term borrowings remained stable or declined (not increased by greater than 15 per cent)?
Yes. The company's short term borrowings have reduced by 60.1 per cent from FY19 to FY21. But we would like to mention that from FY21 to nine months ended FY22, the short-term debt has increased by 54 per cent.

25) Is the company free from meaningful contingent liabilities?
Yes. The company is free from any meaningful contingent liabilities.

Stock/valuations

26) Does the stock offer an operating-earnings yield of more than 8 per cent on its enterprise value?
Yes. The stock will offer 8.6 per cent operating earnings yield on its enterprise value based on its upper price band of issue price.

27) Is the stock's price-to-earnings less than its peers' median level?
No. The company will trade at a price to earnings ratio of 15.3 times compared to peers' median level of 11.4 times.

28) Is the stock's price-to-book value less than its peers' average level?
Yes. The company will trade at a price to book value of 1.1 times compared to peers' median level of 2.3 times.

Also, read our earlier story on Paradeep Phosphates IPO to learn about key IPO details and important company information.

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