Paradeep Phosphates

Second largest private makes of non-urea fertilizers

Proceeds to be used to partly finance acquisition of the fertiliser manufacturing facility in Goa

Paradeep Phosphates Limited (PPL) was incorporated in 1981 as a joint venture between the Government of India (GoI) and the Republic of Nauru to set up facilities for the manufacture of di-ammonium phosphate (DAP) at Paradeep, Orissa. In 1993, the Republic of Nauru disinvested its equity stake to the GoI and PPL became a public sector enterprise wholly owned by the GoI.

In February 2002, GoI disinvested 74% of PPLs equity in favour of Zuari Maroc Phosphates Private Limited (ZMPPL), a 50:50 joint venture between Zuari Industries Limited (ZIL, a K.K. Birla Group company) and Maroc Phosphores, Morocco (part of OCP Group, Morocco). ZIL was demerged into ZuariAgro Chemicals Limited (earlier Zuari Holdings Limited) and Zuari Global Limited w.e.f. July 1, 2012. Currently, ZMPPL holds 80.45% stake in PPL, while the remaining 19.55% is held by the GoI.

The company is engaged in the manufacture of DAP, complex fertilizers of NPK (Nitrogen, Phosphorous and Potassium) grades, and zypmite (gypsum-based product). The company is also involved in trading of fertilizers, ammonia, neutralized phospo gypsum, micronutrient and other materials. With its head office at Bhubaneswar and various regional offices across the country, the company caters to the demands of farmers all over the country through its Navratna brand of fertilizers.

The company is the second largest private sector manufacturer of non-urea fertilizers in India and the second largest private sector manufacturer in terms of DAP volume sales for the nine months ended December 31, 2021.

The company is a part of the Adventz group, as well as OCP. The founding chairman of the Adventz group was the late Dr. K.K. Birla and the current chairman is Mr. Saroj Kumar Poddar. The Adventz group operates in several businesses and has a strong presence in the agribusiness, engineering and infrastructure businesses and emerging lifestyle business. OCP, founded in 1920, with revenues of over US$6.3 billion in 2020, is one of the leading producers of phosphate rock globally and operates largely in the morocco and WesternSahara region which has approximately 70% of the global phosphate rock reserves, and is owned 95% by the Moroccan government.

Phosphate rock is processed to produce phosphorous, which is one of the three main nutrients commonly used in fertilizers (the other two are nitrogen and potassium). India has negligible phosphate reserves and is dependent on imports of phosphate rock (a source raw material) or phosphoric acid (an intermediate raw material) or DAP (finished phosphatic fertilizer).

The company manufacturing facility is at Paradeep, Odisha and includes a DAP and NPK production facility, a sulphuric acid production plant and a phosphoric acid production plant. It utilizes sulphuric and phosphoric acids for manufacturing DAP and NPK.

As of March 31, 2022, total annual granulation capacity of DAP and NPK production plant was approximately 1.5 million tonne per annum (mtpa) while the total annual installed capacity of sulphuric acid production plant was approximately 1.30 mtpaand total annual installed capacity of phosphoric acid production plant was 0.30 mtpa. In addition, the plant has three operational concentrators to concentrate weak phosphoric acid into strong phosphoric acid.

It also has facilities to store raw material in Paradeep, Odisha and at any point of time, it can store 120,000 tonnes of phosphate rock, 65,000 tonnes of phosphoric acid solution, 55,000 tonnes of sulphur, 45,000 tonnes of sulphuric acid, 40,000 tonne of liquid ammonia and 35,000 tonnes of MOP.

The company is currently in the process of increasing the annual granulation capacity of its DAP and NPK production plant to 1.8 mt from 1.5mt, which it expects will be complete by May 2022. It intends to retrofit a new phosphoric acid production plant to increase its phosphoric acid annual production by 120,000 tonne and also intend to install a new evaporator to increase annual production of strong phosphoric acid by 116,000 tonnes.

The company also have two captive power plants of 16 MW each, designed to run on the excess steam generated by the sulphuric acid production plant. Its manufacturing facility is strategically located close to the Paradeep port and has a closed conveyor belt which is 3.4 km long connecting the Paradeep port to manufacturing facility. At the Paradeep port, it has a captive berth with 14 meters draft with facilities to unload solid and liquid cargo. In addition, it owns a railway siding and a cross country pipeline. This enables it to transport raw material directly to its facility.

The company has established an extensive sales and distribution network, with a strong presence in the eastern part of India. As of March 31, 2022, it distributed products across 14 states in India through network of 11 regional marketing offices and 468 stock points. Its network includes 4,761 dealers and over 67,150 retailers, catering to over five million farmers in India, each as of March 31, 2022.

The company primary raw materials include phosphate rock, phosphoric acid, sulphur, ammonia and MOP (muriate of potash). It sources raw materials locally as well as from various other countries such as Morocco, Jordan, Qatar and Saudi Arabia.

The Offer and the Objects 

The offer comprises fresh issue of 239047619 equity shares at upper price band of Rs 42 and 257435897 equity shares at lower price band of Rs 39 aggregating up to Rs 1004 crore by the company and an offer for sale by GoI selling shareholder of up to 118507493 equity shares and Zuari Maroc Phosphates Private Limited of upto 6018493 equity shares aggregating to Rs 498 crore at the upper price band of Rs 42 and Rs 462 crore at lower price band of Rs 39.

The company will not receive any proceeds from the offer and all the offer proceeds will be received by the selling shareholders, net of its proportion of offer related expenses and the relevant taxes thereon.

Promoter GoI selling shareholder post-issue shareholding shall decrease to nil from 19.55% pre issue shareholding while Zuari Maroc Phosphates Private Limited post-issue shareholding shall decrease to 56.1% from 80.45% pre issue shareholding

The company proposes to utilize the net proceeds of the fresh issue towards part-financing the acquisition of the Goa facility amounting to Rs 520 crore, repayment/prepayment of certain borrowings amounting to Rs 300 crore, and balance towards general corporate purposes. As on March 31, 2022, the aggregate outstanding borrowing of the company is Rs 2957.014 crore.

The company entered into a business transfer agreement (BTA) dated March 1, 2021, with ZACL for the purchase of its fertilizer plant in Goa facility as a going concern on a slump sale basis, for a total consideration equal to the enterprise value of Rs 2052.3 crore. The company shall utilise Rs 520 crore from the net proceeds towards part financing the acquisition of the goa facility.

The remaining consideration will be funded from the internal accruals of the company. The goa transaction will complete on completion of this offer and payment of the consideration from the net proceeds of the fresh issue, and upon such completion, it will acquire the business of manufacturing, distributing and/or trading of DAP, Urea, NPK and MOP products, each of which is currently being carried out at the goa facility.

This facility is strategically located close to the Mormugao port and includes two NPK production plants (NPK A and NPK B), an ammonia production plant and a urea production plant. As of March 31, 2021, the total annual fertilizer capacity of the Goa plant is 1.2 mt per annum, with a breakup of 0.4 million tonne per annum of urea and 0.8 mt per annum of phosphates. In addition, the plant also manufactures about 0.23 million tonne per annum of ammonia, which is largely utilized in the production of urea.

The Goa facility also has a captive power plant, a railway siding, infrastructure to store raw material and finished goods and a bagging plant. Raw materials are imported and handled at the Mormugao port, Goa, where the Goa facility has unloading and storage facilities, and subsequently transferred to the factory site by road tankers or trucks

Strengths 

The demand for fertilizers in India is expected to reach approximately 66 mt by FY 2026 growing at a CAGR (compounded annual growth rate) of 2.9%-3.1% from FY2022 to FY2026.

Phosphatic fertilizers are the fastest growing segment in the Indian fertilizer industry. The phosphatic fertilizers segment is expected to grow at a CAGR of 4.2%-4.4% from FY2022 to FY2026 compared to the expected growth of the urea segment at a CAGR of 1.8%-2.2% from FY2022 to FY 2026.

The company is one of the largest manufacturers of DAP/NPK fertilisers in India with a total installed capacity of 1.5 mtpa. The capacity will increase further to 1.8 mtpa in FY2023. Post the acquisition of ZACL’s assets the company will have around 2.6 mtpa of annual manufacturing capacity of phosphatic fertilisers making it the third largest P&K manufacturer in the country. 

The company enjoys leading market share in most of its territories like Orissa, West Bengal, Bihar and Uttar Pradesh. With acquisition of ZACL’s assets, it will enhance its market reach to the Southern and Western markets.

The ideal N:P:K nutrient balance for Indian soil is 4:2:1 while the actual ratio was 7.1:2.7:1 at the end of FY2019. The nutrient imbalance is a result of overuse of urea and low use of NPK which makes the soil acidic. With schemes like soil health cards being implemented by GoI to determine the soil health and advice to farmers on the right fertilisers to use the demand outlook for P&K fertilisers remains positive.

Domestic demand for P&K fertilisers stands at around 25-28 mt whereas the domestic capacity for P&K fertilisers is about 15.8 mt resulting in significant portion being met through imports. Thus, the offtake risk remains low.

One of the promoters of Paradeep Phosphates is Office Cherifien des Phosphates (OCP), Morocco, which is one of the largest producers of phosphoric acid globally. The company procures part of its phosphoric acid requirement from OCP. Since OCP is one of its promoters, the company does not face any challenges in procurement of its key raw material

The company has backward integrated its manufacturing process by producing the two other key raw materials by value, phosphoric acidand sulphuric acid. For the nine months ended December 31, 2021, and the FYs 2021, 2020 and 2019, it produced 36.19%, 43.11%, 41.11% and 40.52%, respectively, of its total raw material requirements by value, with the remainder of such requirements being purchased by it from suppliers.

The company also own large parcels of land aggregating to approximately 2,282.42 acres in Paradeep, Odisha. Its existing manufacturing facility is constructed on approximately 33% of such land parcel. Accordingly, it is able to further significantly expand its facilities on the remaining portion of the land parcel. Its captive berth with 14 meters draft at Paradeep port also has capacity to process additional unloading as its operations further grow.

The company is the second largest in terms of phosphatic fertilizer (DAP and NPK complexes) capacity, as of March 31, 2022. In general, operations in the fertilizer industry are capital intensive due to high costs of land acquisition, construction of manufacturing facilities and high costs of equipment and machinery. Fertilizers manufacturing plants with proximity to transportation facilities typically have logistical benefits. In view of the above, the scale of its facility, proximity to Paradeep port, access to a network of railways, waterways and highways provides it with a competitive advantage and an integrated business model

Since the company only manufacture phosphatic fertilizers, its reliance on subsidies is lower as compared to manufacturers of urea fertilizers. This reduces the strain on working capital compared to manufacturers of urea fertilizers as the subsidy payments are usually disbursed in a delayed manner.

The company integrated business model has been critical to its success and a differentiating factor from competitors. Its integrated business model provides it with the ability to drive profitability, optimize capital efficiency and maintain competitive advantage.

Weaknesses 

The companys 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 and other products is dependent on area under cultivation, soil quality, climatic conditions including rains and adequacy of monsoon, adequacy of water supply, crop prices, and availability of credit to farmers which are beyond control. Further, the demand for fertilizers is dependent on the cropping pattern which may vary year on year for the major crops

The company business is subject to climatic conditions and is cyclical in nature. Seasonal variations and unfavorable local and global weather patterns may have an adverse effect on business, results of operations and financial condition

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 business and results of operations.

The company imports majority of its raw material requirements including rock phosphate, ammonia, Muriate of Potash (MOP) and part of phosphoric acid for production of DAP/NPK fertilisers, which exposes it to foreign exchange risks.

The company intends to acquire the Goa Facility, which has incurred a loss after tax in each of the past three financial years and the nine months ended December 31, 2021.

ZACL is one of the promoters and the promoter of group companies, Mangalore Chemicals and Fertilizers and ZuariFarmhub which are currently engaged in the business of manufacture of fertilizers. In addition, OCP is one of promoters and a majority shareholder of certain of group companies, namely Jorf fertilizers company IV and Jorf fertilizers company V, which are also currently engaged in the business of manufacture of fertilizers.

The import, manufacture, storage, marketing and sale of fertilizers and related products require several regulatory approvals such as licenses/letters of authorisation for carrying on the business of selling fertilisers

The company is subject to laws and government regulations, including in relation to safety, health and environmental protection

The fertilizers and related products industry is highly competitive with several major companies present, and therefore it is challenging to maintain or improve market share and profitability

Chemical fertilizers may cause acidification of the soil due to decrease in organic matter and mineral depletion of the soil, particularly when overuse occurs. Fertilizer overuse can lead to implications such as soil degradation, nutrient imbalance, destruction of soil structure, increasing bulk density, as well as formation, accumulation and concentration of mineral salts of fertilizers which can lead to compaction layer and soil degradation over the long-term. Such effects from overuse may adversely impact the fertilizer industry

Post implementation of nutrient-based subsidy (NBS) for P&K fertilisers, the price differential between urea and P&K fertilisers has widened which has adversely impacted demand for P&K fertilisers. The profitability of the company depends on the movement of international prices of raw material as majority of the raw materials are imported. The ability of the company to pass on any increase in raw material prices to end-consumers through revision of retail prices also plays a crucial role in protecting the profitability of the company. However, the industry has passed on the impact of change in raw material prices as well currency fluctuations albeit with a bit of lag. Thus, at some points the industry may witness erosion of margins for short span of time in a scenario of rising raw material prices which is corrected after a lag.

Valuation 

For FY 2021, consolidated sales were up by 23% to Rs 5164.73 crore. OPM fell 50 bps to 10.5% which led to 18% increase in operating profit to Rs 542.24 crore. Other income decreased 45% to Rs 19.21 crore while interest cost fell 42% to Rs 111.43 crore and depreciation decreased 15% to Rs 83.33 crore. PBT increased 59% to Rs 366.7 crore. Tax expenses were 294% higher at Rs 143.24 crore. Net profit increased 16% to Rs 223.27 crore.

At the higher price band of Rs 42, the offer is made at around 15 times its EPS of Rs 2.7 for the period ended March 31, 2021, on a post-issue equity share capital of Rs 814.5 crore of face value of Rs 10 each. Listed industry peer of the company is Coromandel International, Chambal Fertilizers & Chemicals, Deepak Fertilizers & Petrochemicals, Gujarat State Fertilizers & Chemicals and Mangalore Chemicals & Fertilizers

As of 13May 2022, its listed peers such as Coromandel International trades at FY2021 P/E of 16.9, Chambal Fertilizers & Chemicals trades at FY2021 P/E of 9.8, Deepak Fertilizers & Petrochemicals trades at FY2021 P/E of 12.9, Gujarat State Fertilizers & Chemicals trades at FY2021 P/E of 12.8 adn Mangalore Chemicals & Fertilizers trades at FY2021 P/E of 16.6

For FY2021, Paradeep Phosphates OPM and ROE stood at 10.5% and 12.2%, respectively compared to 14.4% and 27.4% for Coromandel International, 19.9% and 29.3% for Chambal Fertilizers & Chemicals, 23.9% and 11.5% for Deepak Fertilizers & Petrochemicals, 9.8% and 5.2% for Gujarat State Fertilizers & Chemicals and 10.9% and 11.6% for Mangalore Chemicals & Fertilizers respectively.