HP Adhesives

A consumer adhesives and sealants company

The company is increasing solvent cement capacity by 36% while other adhesives and sealants capacity is being raised by 264%

HP Adhesives was originally formed as a partnership firm under the name and style of H.P. International pursuant to a deed of partnership dated January 01, 1987, asamended and restated from time to time pursuant to admission and retirement of partners. The partnership firm, HP International was thereafter converted into a private limited company HP Adhesives Private Limited on May 07, 2019. Subsequently, the company has been converted into a public limited company and the name of company changed to HP Adhesives Limited and a fresh Certificate of Incorporation dated July 01, 2021 issued bythe RoC. HP Adhesives is a fast-growing multi-product, multi-category consumer adhesives and sealants company. Mrs. Anjana Haresh Motwani and Mr. Karan Haresh Motwani are the promoters of the company.

The company manufactures a wide range of consumer adhesives and sealants such as PVC (polyvinyl chloride), cPVC (chlorinated polyvinyl chloride) and uPVC (unplasticized polyvinyl chloride) solvent cement, synthetic rubber adhesive, PVA (polyvinyl acetate) adhesives, silicone sealant, acrylic sealant, gasket shellac, other sealants and PVC pipe lubricant which are sold across India, through an extensive distribution network of distributors, and exported also to several countries, through network of distributors and direct customers. The company also manufactures these products for select large PVC pipe manufacturing companies under co-branding or private label on order basis. It also sell ancillary products like ball valves, thread seal and other tapes and FRP (fiber-reinforced plastic) products for drainage and architectural solutions that are distributed along with its products to the end customers through distribution network.

The adhesives and sealant products have applications in multiple industries such as plumbing and sanitary, drainage and water distribution, general purpose building/ construction and interior operations as well as for glazing operations, woodwork, footwear, automotive, foam-furnishing and other varied industries.

The company manufacturing facility is located at Village Narangi, Raigad (Maharashtra), which is a multi- product manufacturing facility. The manufacturing facility is strategically located in close proximity to Jawaharlal Nehru Port Trust (JNPT) from where it receives supply of imported raw materials as well as from where it export to international market. During the FY 2020-21, the company has sold its products in 21 countries namely, Bahrain, Bangladesh, Ghana, Greece, Iraq, Kuwait, Mauritius, Nepal, Nigeria, Oman, Philippines, Qatar, Republic of Malawi, Saudi Arabia, Taiwan, Turkey, UAE, Uganda, UK, USA and Yemen.

Exports business constitutes 17.20% and 11.51% of total sales in the fiscal 2021 and six months period ended September 30, 2021 respectively and has grown 17.30% CAGR (compounded annual growth rate) over last 11 years.

In fiscals 2019, 2020 and 2021, overall capacity utilization for solvent cement was 54%, 57% and 51%, respectively, for other adhesives was 7,48%, 20.74 % and 34.30%, respectively and for sealants was 7,71%, 38.08% and 52.92%, respectively.

The company distribution network comprises of 4 depots situated in Delhi, Kolkata, Bengaluru and Indore and more than 750 distributors who cater to more than 50,000 dealers in India.  The depots operate as primary freight destination points and secondary freight origin points. Finished products are dispatched from manufacturing facilities to depots and are subsequently dispatched from depots to individual distributors.

The primary raw materials used in the manufacture of adhesives include solvents like acetone, methyl ethyl ketone, cyclohexanone, toluene and resins and other additives. Primary raw materials for sealants include silicon polymers, silicone oil, silica and catalysts. In fiscals 2019, 2020 and 2021 the cost of raw materials and components consumed represented 65.34%, 65.13% and 68.74%, respectively, of revenue from operations. Raw materials are primarily transported to the manufacturing facilities by road. The company sources raw materials from a number of suppliers mainly based in and around the states of the manufacturing facilities. It also imports a few raw materials including resins, polymer and others from Japan, China, Germany and USA. The share of imported raw material as % to total production for the FY 2020-21 and six months period ended September 30, 2021 is approximately 17.1% and 26.99% respectively.

The Offer and the Objects

The offer comprises fresh issue of 4140000 equity shares aggregating up to Rs 113 crore at upper price band of Rs 274 and Rs 108 crore at lower price band of Rs 262 and an offer for sale by selling shareholders (Mrs Anjana Haresh Motwani) of up to 457200 equity shares aggregating to Rs 13 crore at the upper price band of Rs 274 and Rs 12 crore at the lower price band of Rs 262. The company will not receive any proceeds from the offer and all the offer proceeds will be received by the selling shareholders.Promoter Mrs Anjana Haresh Motwani post-issue shareholding shall decrease to 36.7% from 50.56% pre-issue shareholding.

The company proposes to utilize the net proceeds from the issue towards funding capital expenditure for expansion of production capacity at the existing manufacturing facility at Village Narangi, Raigad, Maharashtra and at the additional unit having a proposed construction area admeasuring about 4,532.57 squaremetres. (built-up) area on the adjacent plot amounting Rs 25.51 crore and funding the working capital requirements of the company amounting Rs 54 crore and balance towards general corporate purposes.Capital expenditure proposed by the company shall expand the existing installed capacities for the existing product lines and enable it to also add new products to our existing product portfolio.

As of March 31, 2021, existing facility had an installed production capacity of 6,098.82 kilo litres per annum (klpa) for solvent cement and 3,274.56 mtpa (metric tonne per annum) for other adhesives and sealants.

Post expansion the combined installed production capacity from existing facility and additional unit is proposed to be increased to 8,265.60 klpa of solvent cement and 11,908.40 mtpa of other adhesives and sealants by end of Fiscal 2024. The total estimated cost of the proposed expansion is Rs 26.63 crore.

Strengths

India consumer adhesives industry is expected to clock 9-10% CAGR between fiscals 2021 and 2026 driven by economic recovery and growth in end-user industries. In particular, demand is expected to recover in fiscal 2022, growing at 14-15%, on a low base of fiscal 2021, as the Indian economy recovers from the impact of the pandemic. Overall, growth of the consumer adhesives industry is expected to moderate and log a CAGR of around 8% between fiscals 2022 and 2026.

The company is a leading manufacturing company for its largest product category PVC solvent cement in India in the consumer/ bazaar segment of the adhesive industry.

The company aims at consistently expanding its product portfolio by introducing new product categories as well as SKUs (stock keeping unit) to cater to multiple end-use applications which are sold through distribution network across India. It constantly engage with its distributor network through marketing and promotional activities and also conduct a range of activities such as distributor meets, retailer meets and plumber and carpenter meets which leads to promotion of product brands.

The company started its business activities with only one product category, i.e., PVC, cPVC and uPVC solvent cement. Over last few years, it expanded product portfolio to multiple product categories including silicone sealants, synthetic rubber adhesives, PVA adhesives and other sealants. Having a wide portfolio of product categories enables it to cross-sell to a large customer base (majorly distributors) who in-turn reach out to large number of retail counters for serving the appliers and eventual end-customer

The Indian adhesives and sealants industry has historically been dominated by few major players and presents significant entry barriers. The major player of the industry is Pidilite Industries. These market entry barriers include the development of an extensive distribution network through long-term relationships with distributors, marketing cost and activities and the establishment of a distinct brand to gain product acceptance. The companycompetes with other players on the strength of its distribution network, quality, brand recognition and ability to leverage distributor relationships to connect with the enduse appliers.

Weaknesses

Prices of principal raw materials are subject to changes in the prices of crude oil and other petrochemical intermediates which are linked to international prices and are susceptible to significant volatility from time to time. As a result, the company remains susceptible to the risks arising out of raw material price fluctuations and in particular fluctuation of crude oil prices which could result in declining operating margins.

The company does not have long- term agreements with suppliers for raw materials, and an inability to procure the desired quality, quantity of raw materials in a timely manner and at reasonable costs, may have a material adverse effect on business, results of operations, financial condition, and cash flows.

The company has historically derived a significant portion of its revenue from sales in the western zone. In fiscal 2021 and six months period ended September 30, 2021 the revenue generated from sales in western zone represented 47.03% and 53.65% respectively of revenue from domestic sales. Accordingly, any materially adverse social, political or economic development, natural calamities, civil disruptions, regulatory developments or changes in the policies of the state or local government in this region could adversely affect manufacturing and distribution activities.

The operations of the company involve extending credit for extended periods of time to its distributors in respect of products and consequently face the risk of non-receipt of these outstanding amounts in a timely manner or at all, particularly in the absence of long-term arrangements with distributors. During the fiscals 2019, 2020 and 2021 and six months period ended September 30, 2020 and 2021, bad debts of the company were Rs1.01 crore, Rs 1.88 lakh, Rs 2.05 lakh, Rs 1.95 lakh and Rs 59.77 lakh respectively.

The business requires significant amount of working capital primarily as a considerable amount of time passes between purchase of raw materials and collection of receivables post sales to customers. As a result, it is required to maintain sufficient stock at all times in order to meet manufacturing requirements as well as extend credit period to customers as per the industry practice, thus increasing storage and working capital requirements

Stringent environmental, health and safety laws and regulations or stringent enforcement of existing environmental, health and safety laws and regulations may result in increased liabilities and increased capital expenditures for the company.

Valuation

For FY 2021, consolidated sales were up by 24% to Rs 118.16 crore. OPM rose 540 bps to 4.7% which led to 166% increase in operating profit to Rs 11.97 crore. Other income increased 135% to 5.72 crore while interest cost fell 13% to Rs 2.55 crore and depreciation remained flat at Rs 1.9 crore. PBT before EO increased 537% to Rs 13.23 crore. The company reported nil EO items during the year compared to EO expense of Rs 7.44 crore in FY19 due to exceptional item of settling tax claims/ disputes under the Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 and Maha VAT Amnesty Scheme. PBT after EO was Rs 13.23 crore compared to loss of Rs 5.36 crore. Tax expense was Rs 3.17 crore compared to credit of Rs 69lakh. Net profit was Rs 10.06 crore compared to loss of Rs 4.67 crore.

For H1FY2021, consolidated sales were up by 57% to Rs 70.52 crore compared to H1 FY2020 primarily driven by volume increase as well as better realizations across product categories. OPM decreased by 220 bps to 7.3% which led to 21% rise in operating profit to Rs 5.13 crore. Other income increased 22% to Rs 2.22 crore, while interest cost rose 55% to Rs 1.72 crore and depreciation increased 35% to Rs 1.41 crore. PBT increased 7% to Rs 4.21 crore. Tax expenses for H1 FY2021 was up 12% to Rs 1.11 crore.Net profit rose 6% to Rs 3.1 crore.

The TTM EPS on post-issue equity of Rs 18.37 crore works out to Rs 5.6. At the upper price band of Rs 274, P/E works out to 49.2.Listed industry peer of the company is Pidilite Industries.

As of 9 December 2021, its listed peers Pidilite Industries trades at TTM P/E of 85.7.