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Monday, 22 February 2021
CM RATING 46/100


Heranba Industries

Dominant player in synthetic pyrethroids

The company is present in the entire product value chain of the agrochemicals industry i.e. intermediates, technicals and formulations

Heranba Industries was incorporated in 1992, and taken over by current promoters, Mr Sadashiv K Shetty and Mr Raghuram K Shetty, in 1994. It is a crop protection chemical manufacturer, exporter and marketing company based out of Vapi, Gujarat. It manufactures intermediates, technicals and formulations. It is one of the leading domestic producers of synthetic pyrethroids like cypermethrin, alphacypermethrin, deltamethrin, permitherin, lambda cyhalothrin etc. Its pesticides range includes insecticides, herbicides, fungicides and public health products for pest control.

Pyrethroids are synthetic chemical compounds that are procured from chrysanthemum cinerariaefolium flowers. Owing to these properties, they are used to control pest insects in farms, homes, communities, restaurants, hospitals and schools.Pyrethroids were first developed in the 1950s. Pyrethroids are currently available in the form of emulsifying concentrates, wet powders, granules and ultra-low-volume (ULV) spray.

The business verticals include -

(a) Domestic institutional sales of technicals: The company manufacture and supply technicals to leading domestic and multinational agrochemical companies operating in India which are used by them for manufacturing their own products. Some of the companies to whom it supply technicals in India are Sumitomo Chemical India, Biostadt India, Sulphur Mills, Crystal Crop Protection, NACL (Formerly Nagajuna Agrichem), Sharda Cropchem, Meghmani Organics, PI Industries, Agro Life Science Corporation, Krishi Rasayan Group amongst others.

(b) Technicals Exports: The company export technicals in bulk to customers outside India to various agrochemical companies across the world. It export technicals to certain multinational companies like Shanghai Agricare Chemical Co., China amongst others.

(c) Branded Formulations: The company manufacture and sell various formulations of insecticides, fungicide, herbicides and public health under its own brand through distribution network present across India.

(d) Formulations Exports: The company exports formulations in bulk and in customer specified packaging outside India. Sales of formulations in the international markets is generally undertaken by way of tie-ups with its international distribution partners who import formulations, in bulk or final packages, after a prolonged and detailed registration process in their respective country’s regulatory authority.

(e) Public Health: The company also manufacture and sell general insect control chemicals to governmental authorities like municipalities by participating in public health tenders issued by them and to pest management companies

Heranba Industries started its manufacturing activity in the year 1996 with production of an intermediate product CMAC (Cypermethric Acid Chloride). By FY01-02, it forward integrated the company into the manufacturing of various technicals like metametron, cypermethrin, alpha, permethrin and deltamethrin. By the end of the FY04-05, it further expanded its product range to formulations, which are final products sold to farmers as pesticides, herbicides, fungicides for crop protection and into public health products in FY10-11.

The company is present in the entire product value chain of the agrochemicals industry i.e. intermediates, technicals and formulations and holds registrations for 18 technicals for manufacture and sale in India, 103 technicals & formulations for manufacture and sale in the export markets and 169 formulations registered for manufacturing and sale in India.

The company has filed applications with the CIB&RC (Central Insecticides Board and Registration Committee) for registration of 14 technicals & formulations for manufacture & sale in India and 7 technicals and formulations to manufacture for the export markets and they are in the process of evaluation. It has diversified its business from manufacturing and selling of intermediates to manufacturing, marketing and selling of technicals and formulations. Majority of the company’s current intermediates production is utilized for captive consumption for the manufacturing of technicals products. Formulations are produced and packaged in powder and liquid forms and sold to distributors for further sales to farmers.

The company has in-house R&D team for product development and improvisation which is well supported by product registration team. R&D facilities at Unit I and II are recognized by the Department of Scientific and Industrial Research, Ministry of Science & Technology, Government of India (DSIR). Its new R&D facility at Unit III, Sarigam has become operational from October, 2020.

The company exported its products to more than 60 countries in Latin America, CIS, Middle East, Africa, Asia and South East Asia in FY20. As of November 15, 2020, its international distribution partners have successfully obtained 371 registrations of its technicals and formulations in 41 countries across Middle East, CIS, Asia, South East Asia and Africa and have presently filed 172 registration applications for technicals and formulations products which are pending before the regulatory authorities in 41 countries.

The company has an extensive distribution network in India supported by a skilled sales force. It has more than 9400 dealers having access to 21 depots of the company across 16 states and 1 union territory in India supporting the distribution of its products.

The company has 3 manufacturing and packaging facilities in and around the industrial belt of Vapi, Gujarat having 174 reactors with an aggregate manufacturing capacity of 14,024 MTPA. These facilities will manufacture intermediates like cypermethric acid chloride, cypermethric acid and technicals like cypermethrin, alphacypermethrin, deltamethrin, permitherin and ambda cyhalothrin amongst others and a range of insecticides, herbicides and fungicides formulations.

The company uses many chemicals as raw materials for manufacturing their products. The key raw materials are sourced from domestic companies, local suppliers and some of them are imported mainly from China. Key domestic suppliers are SRF, Crescent Organics, Gujarat Flourochemicals, Gujarat Alkalies and Chemicals, Sanjay Chemicals (India), Haresh Petrochem, M.B. Sales Corporation and Akin Chemicals amongst others. It has not entered into any long-term contracts in relation to the sourcing of raw materials and supply is generally based on an estimate of 2-3 months of manufacturing schedules.

The Offer and the Objects

The offer comprises of a fresh issue of 956938 equity shares at upper price band of Rs 627 and 958466 equity shares at lower price band of Rs 626 aggregating up to Rs 60 crore by the company and an offer for sale of up to 9015000 equity shares, aggregating to Rs 565 crore at upper price of Rs 627 and Rs 564 crore at the lower price band of Rs 626 by the selling shareholders. The company will not receive any proceeds from the offer for sale.

The offer for sale comprises up to 5850000 equity shares by Sadashiv K. Shetty (promoter selling shareholder), up to 2272038 equity shares by Raghuram K. Shetty (promoter selling shareholder), up to 812962 equity shares by SAMS Industries Limited (promoter selling shareholder), up to 40000 equity shares by Babu K. Shetty, and up to 40000 equity shares by Vittala K. Bhandary.

The net proceeds of the fresh issue are proposed to be utilized towards Rs 50 crore as working capital requirements and to fund expenditures towards general corporate purposes.

Strengths

The company manufactures intermediates, technicals and formulations which form part of the entire value chain of synthetic pyrethroids and other active ingredients in the agrochemicals business.

Various technicals will be going off-patent in the near future which may lead to a good demand for the generic versions of these molecules across the world, especially in the highly regulated markets of USA and Europe. The company believes there is significant growth potential in these markets with higher margins for its existing and new line of products.

The recent trade tensions between the US and China has benefited the Indian agrochemical industry. China is the largest exporter of agrochemicals to the US, accounting for around 22% of the total US import in 2019. India stands at the second position with a share of 17%. The trade war between the US and China has provided a lucrative opportunity for Indian firms to increase their export potential in the long run.

The company expects the demand for pyrethroids in India to remain positive during 2020-2025, exhibiting a CAGR of 19.6% and reaching a sales value of US$ 205 million by 2025.

In 2019, Heranba Industries Limited dominated the India pyrethroids market, accounting for a share of 19.5% of the total Indian pyrethroids production values. Heranba Industries was followed by Tagros Chemicals India (14.8%), Hemani Industries (9.9%), Dhanuka Agritech (8.7%), Insecticides (India) (7.9%), Syngenta India (6.2%), Sumitomo Chemical India (5.8%), UPL (4.2%), Bayer CropScience (3.9%), Rallis India (3.6%), Excel Crop Care (3.4%) and Others (12.1%).

Weaknesses

The agrochemical industry has an extensive consumption of raw materials that are derived from crude-oil, chlorine, yellow phosphorus and bromine. As these materials are essential for the manufacturing of technical grades, any fluctuation in the pricing of these raw materials, directly impacts the overall production costs of agrochemicals.

The key Indian agrochemical companies import a significant part of their technical requirements from China as it sources most of the raw materials required to manufacture agrochemicals. Any restriction or curtailment on imports from China, the country from which it import some of its raw materials, or any other general restriction or curtailment on import of any raw materials it require, could affect business, financial condition and results of operations

The company's operations are subject to environmental and workers’ health and safety laws and regulations. It has to incur material costs to comply with these regulations or suffer material liabilities or damages in the event of an incidence or non-compliance of environmental laws and regulations which may have a material adverse effect on business, financial condition and results of operations

A substantial area under cultivation in India is still not well-irrigated and depends on the monsoon. Thus, the fortune of the agrochemicals industry is linked to rainfall received during the year. There is intense price and product competition from local players and multinational corporations. Operations are also exposed to government regulations.

The rapid photodegradation and high susceptibility to moisture and heat are limiting the effectiveness of pyrethroids in agriculture and other open space applications. Moreover, although pyrethroids offer lower toxicity to human applicators and nontarget mammals and birds, they are highly toxic to invertebrates and fish. Furthermore, the behavioral and genetic changes in insects that result in resistance to pyrethroid treatment act as another major restraint to the market growth.

The lndian agrochemicals market is highly fragmented in nature with many formulators. The competition is fierce with large number of organized sector players and spurious pesticide manufacturers.

The company is subject to counterfeit and pass-off products, which could adversely affect the reputation of its branded formulations business and consequently, business, financial condition and results of operations

Valuation

Heranba Industries revenues rose 23% to Rs 618.34 crore in H1 of FY 2021primarily led by increase in revenue from domestic institutional sales of technicals and branded formulations by 31% and 72% respectively. Domestic institutional sales of technicals formed 32.99% of total sales in H1FY21 while technicals exports formed 32.17%, branded formulations 22.8%, formulations exports 9.27% and public health 2.76%. Operating margins rose 100 bps to 16.1% resulting into 31% increase in operating profit to Rs 99.28 crore. Net profit was up 25% to Rs 66.31 crore.

For FY2020, net sales fell 5% to Rs 951.37 crore. The operating margins rose 50 bps to 13.6%, resulting into 2% decrease in operating profit to Rs 129.35 crore. Net profit was up 30% to Rs 97.75 crore.

At the higher price band of Rs 627, the offer is made at around 22.6 times its TTM EPS of Rs 27.7 for the period ended September 30, 2020 on a post-issue equity share capital of Rs 40.01 crore of face value of Rs 10 each. Listed industry peers of the company are Rallis India, Sumitomo Chemical India, Bharat Rasayan and Punjab Chemicals and Crop Protection.

Rallis India trades at 24.6 times its TTM EPS of 10.5 for the period ended September 30, 2020 at the current market price of Rs 259. Sumitomo chemicals trade at 57.5 times its TTM EPS of 5.2 at the current market price of Rs 299. Bharat Rasayan trades at 29 times its TTM EPS of 337.2 at the current market price of Rs 9778. Punjab Chemicals and Crop protection trades at 43.7 times its TTM EPS of 19.5 at the current market price of Rs 852.

Heranba Industries: Issue Highlights

Fresh issue (in Rs crore) 60
Offer for sale (in number of shares) 9015000
Offer for sale (in Rs Crore)  
- in Upper price band 565
- in Lower price band 564
   
Price Band (Rs) 626-627
For Fresh Issue Offer size (in no of shares )  
- in Upper price band 956938
- in Lower price band 958466
Pre issued capital (Rs crore) 39.06
Post issue capital (Rs crore)  
- in Upper price band 40.01
- in Lower price band 40.01
Pre issue promoter and Promoter Group shareholding (%) 98.85
Post issue Promoter and Promoter Group shareholding  
-On higher price band (%) 74.15
-On lower price band (%) 74.15
Bid Size (in No. of shares) 23
Issue open date 23/02/2021
Issue closed date 25/02/2021
Listing BSE, NSE
Rating 46

 

Heranba Industries: Financials

Particulars 1803 (12) 1903 (12) 2003 (12) 1909 (06) 2009 (06)
Total Income 741.25 1004.44 951.37 501.65 618.34
OPM 11.8 13.1 13.6 15.1 16.1
Operating Profits 87.81 131.41 129.35 75.71 99.28
Other Income 5.32 7.39 16.53 0.58 0.87
PBIDT 93.12 138.81 145.88 76.30 100.14
Interest 11.81 10.73 8.84 3.81 3.46
PBDT 81.32 128.07 137.05 72.49 96.69
Depreciation 5.01 5.95 8.20 3.62 6.60
PBT Before EO 76.31 122.12 128.84 68.87 90.08
EO 0.00 0.00 0.00 0.00 0.00
PBT after EO 76.31 122.12 128.84 68.87 90.08
Provision for Tax 28.77 46.28 31.09 15.63 23.77
Profit after Tax 47.54 75.84 97.75 53.24 66.31
Share of loss of JV 0.00 0.00 0.00 0.00 0.00
Net Profit 47.54 75.84 97.75 53.24 66.31
PPA 0.66 0.44 0.00 0.00 0.00
Net profit after PPA 46.88 75.40 97.75 53.24 66.31
EPS (Rs)* 11.9 19.0 24.4 # #
*EPS is on post issue equity capital of Rs 40.01 crore of face value of Rs 10 each
# EPS not annualized due to seasonality of business
Figures in Rs crore
Source: Capitaline Corporate Database